Watch Mike Harris's Find Your Lightbulb Tutorial

Mike Harris's Blog

You don't know what you've got till it's gone

Sunday, September 21, 2008

As the world flirted with financial meltdown last week a song popped into my head. For once it wasn't a Dylan song although he did make a cover version. It was a Joni Mitchell song from 1970 , called Big Yellow Taxi. She wrote it in Hawaii where she had seen a newly constructed parking lot diminish the iconic view of the distant green mountains. Hence the lyrics:

Don't it always seem to go That you don't know what you've got Till it's gone They paved paradise And put up a parking lot:

What struck me when I first heard that song and still strikes me now is the universal truth of the sentiment:

Don't it always seem to go That you don't know what you've got Till it's gone

The relevance to the credit crunch may not be immediately apparent but stay with me and I'll try and make the link.

Whatever diagnoses of the causes of the great panic of 2008 eventually emerge when we have some perspective, the whole series of events must raise some questions about bank regulation.

The primary purpose of bank regulation is to avoid systemic risk - that is risks to the entire financial system. Exactly the sort of risks we have been living through. It is clear that regulators neither anticipated nor took action to avoid such risks. Until eventually the US government came to the rescue (I hope!) with a massive bail out - about time guys but better late than never!

I'm not intending to criticise regulators at all but instead just to make one observation. I thought Banking regulation in the UK was fantastic when it was the responsibility of the Bank of England.
(It was moved to the FSA in 1997 by Gordon Brown, and the then Governor of the Bank of England Eddie George came close to resigning as a result).

It used to be based on cosy fireside chats between senior Bank of England officials and Bank CEOs with many a nod and a wink.

What worked was the Bank of England official knew both banking and the institution he or she was supervising backwards and those chats stopped being cosy the second the Bank CEO couldn't explain exactly what was going on at the Bank or worse still wasn't totally open and honest about everything. There was a sense of shared responsibility for the well being of both the institution and the banking system. If there was trouble they were both in trouble.

The FSA system was far more professional and apparently rigourous but the context of the reviews shifted from "we are both in this together and these meeting are really useful to both of us" to a box ticking type of risk review that could easily miss the big picture and which certainly wasn't welcomed by the Bank as something valuable.

So there you go - I don't know whether the old Bank of England regulatory approach would have shielded British banks from a global crisis which was born in sub prime America but I bet it would have dealt with the crisis better- as of everything else in the world it is perhaps true of bank regulation :

That you don't know what you've got Till it's gone

The Myth of Risk Management

Thursday, September 4, 2008

I've been reading this book and it certainly chimes with my own views of risk ie that:

You can't avoid risks and it's almost impossible to make an intiuitive assessment of any risk without some sort of structured process which opens your eyes to the real issues you need to take care of

the best risk management strategy is for accountable people to take responsibility , use their judgment and confront risk with eyes open rather than seeking to avoid risks through health and safety style risk assessments or box ticking risk management and governance procedures

I have long thought that the modern corporate culture of govenance and risk management by box ticking often supported by mathematical modelling of amazing complexity takes up so much time and is so mind bogglingly boring that accountable executives just switch off and stop thinking. Somebody else is doing the thinking for them. Hence the credit crunch perhaps.

Cairns generalises this view of mine - any risk management strategy which isn't about accountable people keeping their eyes open and confronting risks can make things worse by reducing people's perception of risk (thus provoking more reckless behaviour or causing people to stop using their judgment) or by reducing people's ability to manage risks because they have been too protected .

Some examples:

In terms of risk perception: people are more worried about plane crashes than car crashes or heart disease : yet you would have to fly every day for 26000 years to die in a crash. You would have had 20 car crashes by then and died 90 times from a heart attack.

In terms of more reckless behaviour: cyclists are more at risk when wearing helmets because their own riding is more dangerous and motorists are less careful around them

In terms of stopping thinking: 25% of people will need criminal record checks under new child protection legislation; Cairns argues this will make children less safe because we will all think anybody working with our children will be safe and we won't keep our eyes open and stay alert.

In terms of reducing people's ability to manage risk: children who only play on cushioned playground areas are more likely to get injured when outdoors than those who play in apparently more dangerous areas because the latter have learned to recognise and cope with numerous unavoidable risks.

In business you can't avoid risk. It's a key leadership accountability to understand the real risks you are taking and make sure they are smart risks. It's a key leadership accountability to keep your eyes open and confront the reality of your current situation - balancing on the edge of reason.

It's a good thing small businesses can't afford the elaborate risk managment and governance processes that big businesses use - they are expensive and positively dangerous!

Mike Harris's Blog

You don't know what you've got till it's gone

The Myth of Risk Management

Previous Posts

Archives