Saturday, 22 September 2007

Unintended Consequences - Bah, Humbug!

The comment from Mervyn King that he was debarred from covert operations to rescue Northern Rock by EU rules, a comment which some European sources have said is a complete misreading of the EU legislations' intent, reminds me of what AIRMIC's Counsel said about the Treasury's implementation of the Insurance Mediation Directive - see my previous blog.

With the Insurance Mediation Directive the lawyers in the Treasury, aided by those in the FSA, were so keen to stick to their principles of regulation (sound familiar?) and the purity of their operation that they disregarded the spirit of the EU Directive and gold plated the regulation so that some groups, such as buyers of insurance, would have to be unnecessarily regulated.

Perhaps they did this because such an approach gives them more power ( this would be the way Japanese bureacrats would work), perhaps because then they can't be blamed as they've covered every eventuality, but perhaps most of all in the "nanny knows best" attitude that pervades the British Civil Service they did it because they are micromanagers and they fear that events will get out their control. Regardless of the FSA's commitment to risk based principles too many of their lawyers are promoting the opposite of a risk taking approach.

Of course in the case of Northern Rock events did get of control. There were "unintended consequence of recent legislation" said the Governor of the BoE which prevented him from acting as he would have liked to restore stability. This is a miserable excuse. The triumvirate of the Treasury, the BoE and the FSA should have been regularly conducting crisis management testing to ensure that any legal obstacles to their actions were identified and action taken before the event to remove them.

Any dependency model which starts with the objective of preventing a run on the banking system ( surely one of the top risks for the triumvirate) would have then searched out the obstacles and assigned weightings to them. The causes of the run are immaterial to the exercise when it comes to legislative limitations on actions. What I would like to know is " Were such models developed, were they tested and why weren't the obstacles which the Governor spoke about identified?".

It seems that the regulators who have preached business continuity planning and stress testing to their markets have been remiss when doing the same for their own operations.

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