Bank Off Scotfree

See Chapter 5.

Numerous questions tumble out of the cracks of the FSA's report on the destruction of Bank of Scotland: where is the review of the FSA's ARROW visits (as for Northern Wreck)? who were the key participants and their highly paid flunkies? Were any of them also responsible for the bank's £20m worth of bad attitude to complaints, by any chance?

For the tuppence it's worth, the report says that from 2006 to 2008:

"(1)  there were serious deficiencies in the control framework, which meant that it failed to provide robust oversight and challenge to the business;
(2) there were serious deficiencies with the framework for the management of credit risk across the portfolio which meant that there was a lack of focus on the need to manage risk across the portfolio as a whole;
(3) there were serious deficiencies in the distribution framework which meant that it did not operate effectively to reduce the risk in the portfolio; and
(4) there were serious deficiencies in the process for the identification and management of transactions which showed signs of stress which meant that they were neither identified promptly nor managed effectively."

And there were:

"targets which incentivised ...:
(1) prioritising the development of relationships with and the facilitation of customers;
(2) increasing the appetite to lend;
(3) increasing the appetite to take on greater credit risk;
(4) fostering an attitude of optimism at the expense of prudence; and
(5) regarding risk management as a constraint on the business rather than integral to it."

Furthermore, there were:

"significant issues as to the quality, reliability and utility of the available management information which directly affected the effectiveness with which the risks of the business could be assessed, managed and mitigated."

And, finally:

"(1) Group Risk failed to conduct effective oversight and control of Corporate; and
(2) there were issues with the quality and scope of assurance work undertaken by Group Internal Audit."

The FSA's solution?

"In these exceptional circumstances, the most effective way in which to balance the need for deterrence and act in the wider public interest is to issue a public censure."

Desperate times call for desperate measures!

Sweat The Small Stuff

I enjoyed a great conversation with the Renegade Economist on Thursday. On the humorous side, it reminded me that:

"Among the maxims on Lord Naoshige's wall, there was this one: "Matters of great concern should be treated lightly." Master Ittei commented, "Matters of small concern should be treated seriously." Ghost Dog (previously cited here).

But, seriously, it's stunning how little of the detail is really understood by our institutions. Instead, they are obsessed with erecting grand schemes that are shaped most by surprise events beyond our control - 'black swans'. These grand schemes, like the 'single market' and the Euro, are brittle political constructs that neither minimise our exposure to the downside of surprise events nor maximise our exposure to the upside. Worse, they distract us from coping with structures that emerge organically outside the artificial regulated sphere as well as day-to-day outcomes that we might otherwise have avoided within it. It was typically five years too late before any financial regulator demonstrated any understanding of the shadow banking system lurking outside the walls, for example. And our regulated financial system has suffered from within due to poor due diligence on sub-prime debt, lack of scepticism amongst auditors, analysts who rarely say 'sell', banks who are fined millions for lax controls, and tax incentives that concentrate investors' risk and fail to deliver finance to creditworthy people and businesses.

Retail is detail, they say, but so is everything else. We need to align our tax and regulatory system with our actual or desired end-to-end activities, bottom-up, rather than with artificial, paternalistic institutional visions for the future.


Image from Core77.