Tuesday, May 10, 2016

Drawing A Distinction Between Risk And Uncertainty….

The 12 Step Program
for Recovering Robusterians

Step 1: Admit you were silly.
The Wall Street Journal published an interview not too long ago with Andrew Haldane, who is the Director of 
Financial Stability at the Bank of England - not exactly a position of unimportance nor invisibility in global finance!  

Mr. Haldane has worked at Great Britain's equivalent of the Federal Reserve since 1989 and "has become known as one of the world's most innovative thinkers on finance." (Despite that international reputation, his resume does not indicate he has ever worked at the NCUA.)

Not a few credit union leaders are holding their collective breaths as the NCUA bumbles forth into the realms of stress testing, risk-based capital, derivatives, and supplemental capital with unproven techniques and untested regulations, designed to reshape our measurement and management of risk.  

We are confronted with a period of much regulatory uncertainty at NCUA - with competence and capacity an unknown factor.

Here's what Mr. Haldane had to say in the interview about "uncertainty"…. 

"The global financial system is best thought of as a "complex, adaptive web."  It's diverse and interconnected, but it's also prone to erratic, sometimes counter-intuitive behavior.  Financial market participants can be smart and use information to make better decisions, but they can also follow a herd into disaster."

"Such a system is intrinsically riddled with uncertainty", he says, drawing a distinction between risk, which is quantifiable, and uncertainty, which isn't. " 
Humbleness and humility -
not exactly strong suits at the Agency!

"There are natural limits to what you can know.  And, taking seriously not knowing, taking seriously ignorance, I think is tremendously important for public policy.  
Humbling, but important."

"The goal of financial regulation [over the past decade] became to capture every raindrop rather than to look out for thunderstorms."


1 comment:

Anonymous said...

For years NCUA has been a ship without a rudder. It has had a captain but one who did not know North from South. Now, an oarsman has been placed at the helm and must first cut the strings that have guided him since his arrival. He must stop looking over his shoulder to see if he is being followed and he must rid himself of the fear of being verbally abused should he make a mistake. Perhaps some medical marijuana might help do the trick.If not, we can only hope that the term at the wheel will be short lived.