“A bank without a chief risk officer is a bit like a football team without a left tackle. It’s not the sexiest position on the field, and most fans couldn’t recognize him without a helmet, but what the left tackle does is crucial. He’s the guy protecting the quarterback’s blind side when a 250-pound pass rusher is trying to pulverize him. Silicon Valley Bank not having a chief risk officer for a brutal year in tech was the equivalent of that left tackle walking off the field during a blitz.”
– Ben Cohen, Wall Street Journal ($). He is reflecting on how Silicon Valley Bank did not have a chief risk officer in place for eight months. The reason why classical liberals should focus on this aspect of the bank’s demise is because at the moment there are calls for yet more rules and regulations on banks. But the problem in my view is that there are plenty of rules, but they aren’t often enforced consistently, or intelligently. (Apologies to non-followers of NFL football, but I think you get the point of it.)
But Cohen adds this important caveat, which is another twist on the whole “moral hazard” argument that we hear about a lot when banks fail: “The existence of a chief risk officer created the appearance of proper oversight and satisfied regulators, but having someone to police risk meant the traders actually taking those risks might have felt they didn’t have to be so vigilant.”
Hmm. So in the end, having a CRO in place might, ironically, make a bank even more cocky because of the assumption that there is a person there to keep everyone on-point.
Not to be to harsh, but the bank failed because it was ill run. If they had kept a 10 percent cash reserve against their demand deposits and the other 90 percent in 30, 60, and 90 day treasuries and short term commercial paper, their capital would not have declined so precipitously and if there had been a run they would have had the liquid assets to meet it.
Back in the days when the Health & Safety bandwagon began to run, I met a colleague who was H&S Officer for one of our factories. He told me that he had Authority to stop the line immediately if he saw an H&S hazard. He also told me that Management had made it clear to him that if he used his Authority he’d better have a really really really good reason… I suspect CROs operate under similar guidance.
Curious about one aspect of this:
In most corporations, you have a Risk Manager. This person handles oversight of risk, usually in physical facilities and processes. They’ll run corporate safety programs. They’ll handle and design insuring programs against such risks. They’re busy people.
Does the position expand to fill such things as investment hedging strategies like the ones that seem to have been lacking at SVB? They would appear to be out of the wheelhouse of what I have always known as “Risk Management.” Such an expansion would, to me, make “Risk Management” into the controlling department of every company. “If we do X, we risk lower profits, so bring in the Risk Manager!”
The bank failed because it was more concerned with appearances, looking good on all the social value bullshit, rather than with finances. Same thing happened in 2008. Same sort of people are responsible.
You tell me you’re running a bank for social justice? I’m taking my money out.
Money is information. If you can’t get your loans back from a certain demographic or a certain neighborhood, that’s information. You ignore that at your peril. If the people you want to make loans to can’t get them, then that should tell you something.
The problems with our financial system have nothing to do with “big money”, and much to do with “big social engineering” and the mentality that there’s some sort of virtue attached to poverty. There isn’t; it’s mostly down to being unfit for purpose in the modern world. Some of that might be correctable, but the raw fact is that many of the benighted poor are like that because they’re failures at modern life. You can’t fix that, when it’s an intrinsic part of their nature. They were programmed for a different environment, and unless you bring that environment back, they’re never, ever going to do well.
It ain’t racism. It’s more “adaptationism”, and we should be a lot more honest about it. You can’t adapt to modern life? Well… What’s a humane solution for the unfit? Compulsory sterilization, maybe gene-banking their maladaptive genes in case we run into those conditions again?
It is well known that Silicon Valley Bank, like most of the big banks and big corporations in the Western world, was obsessed with “Woke” (Frankfurt School of Marxism) doctrines – and it is amusing, in a rather sick way, to see these “Capitalist” corporations so obsessed with organising “Pride Month” and BLM events (and the general Frankfurt School tap dance) that they do not bother with such things as Risk Management. “Go Woke and Go Broke” and “what are capitalists doing pushing the doctrines of a Marxist sect?” and all the rest of it.
However, let us imagine that Silicon Valley Bank had been run by non “Woke” people – say picked by the Wall Street Journal editorial board, would the basic business model of Silicon Valley Bank (or the rest of the international “financial community”) have been rational?
No – even run by people picked by the Wall Street Journal, the basic business model of the bank would still have been crazy (utterly crazy). So does it really matter that the executives of the bank spent their time organising Pride Months, and BLM events?
No one is more “anti Woke” than me – but I doubt it does matter in this case.
It is as if the Wall Street Journal was complaining that a ship was painted bright pink, and that the crew all wore dresses and lipstick. and that officers were picked on the basis of their skin colour – whilst ignoring that the ship had a massive hole in it which was letting in the water.
And the other banks and other such – are much the same.
It is the massive hole in the ship that matters. The monetary and financial system is not rational.
This is not capitalism – and (before anyone says it) it is NOT really based on “borrowed capital” (the Real Savings of other people).
A ship that has its bottom torn off is no longer a ship – it is the wreak of a ship.
What bobby b. said. I also do not understand this new direction of vesting decisions and analysis about a bank’s fiscal risks in a single manager, like the guy at work who checks the fire extinguishers and makes sure the crane certs are current. Fiscal/investment risk in a bank isn’t a separate department – it’s the very core, the essence of their business, and it should be one of the first responsibilities of every manager and executive.
If there is to be such a specific position, I think it should be filled (to riff off a suggestion made by Frank Abagnale, before mentioned on these pages) by a person with at least 30 years of banking experience, preferably in the Balkans or the former Soviet bloc, and with at least one term of imprisonment for fraud, embezzlement or similar. Only a person like that knows where to look for trouble and to recognize it when he sees it. A 27-year-old graduate from Yale or the Wharton Business School is quite-possibly the worst-possible candidate for such a position – they wouldn’t know a risk if it walked up and bit them in the ankle. As we see in the instant case.
llater,
llamas
This refers to the “Other” failure; Signature Bank.
This thread https://twitter.com/moetkacik/status/1639274833664962561?cxt=HHwWgsCz3dTx778tAAAA
Linking to this article; https://prospect.org/economy/2023-03-23-rich-bank-dumb-bank-signature/
It seems to me, with the infamous Edmund Safra coming up, notorious money launderers Republic, bought by the biggest launderer of all, HSBC, and Signature being founded by former Republic bankers, the “Risk” department would be solely to facilitate their shenanigans.
Oh and throw in Bankman-Fried, Slum Landlords and “Irv “Gotti” Lorenzo, viceroy of Def Jam’s Murder Inc., accused in 2005 of laundering drug money.”, it’s going to make some movie.
Kirk goes from the risk management fuckup at SVB to making a suggestion for compulsory sterilisation. Well, it’s a point of view.
Woodrow Wilson was unavailable for comment.
While I can’t stand wokeness etc, blaming bank failures on it reminds me of those who blamed the 2008 crash on things like ACORN and CRA. While those things surely contributed, they only scratched the surface of what was going on.
What exactly is ‘modern life’? I see a lot of people who seem to be doing very well out of ‘modern life’ aren’t exactly stellar human beings.
I liked this one about Signature:
https://cryptadamus.substack.com/p/how-everyone-got-the-story-of-silicon
@Jonathan Pearce,
I think you’ve missed the inherent sarcasm, there.
The correct response to maladaptation to a set of circumstances or environmental factors is to first recognize the problem, and then take action to adapt. You can do that by several methods; say that you are forced to live in an Arctic environment, and are freezing your ass off. You can selectively breed for better fur, or you can do like the Inuit did and start “borrowing” the fur from other animals… Either one is adaptation.
What you can’t do is ignore the problems of extreme cold weather.
Likewise, that “modern life” thing: You can do like we’re doing, and just let the maladapted roam free, crapping on the sidewalks, or you can deal with it through other means. From appearances, we need to find “other means” damn soon, or we’re going to be losing several major urban areas.
Not a fan of Wilsonian eugenics, but I observe nonetheless that nature will take its course, no matter what. You can’t cope? You’ll effectively cull yourself, just as you would in a more natural environment where your behavior led to a loss of nutrition or territory.
I’d prefer we found another humane means of dealing with this, rather than waiting for nature to clean up the mess we’ve created. Obfuscating the problem and trying to be “nice” about it is only prolonging the agony.
But, don’t worry about it: When things get a bit closer to the bone, you’re going to start seeing people taking things into their own hands, and dealing with the street-poopers the way that the old-timers would have. Likely, summary executions or something equally “nice”.
The real worry about all this is the damage done to people’s sensibilities about their fellow human. Time was, most people I know would look at a vagrant individual, begging for money, and go “Awww… Look at that… How sad!! Let me give him some money…”
Now? I don’t see a lot of sympathy or empathy; people are tired of hosing human feces off their sidewalks. That’s only going to keep on going places I’d rather our society didn’t go.
Used to be, the mal-adapted would fail to procreate, and their lines would trail off.
Now, everyone is failing to procreate, and so there is less of an apparent effect.
We really do need higher birthrates, so that we can swamp the world with “normal” once again.
😉
Successful behavior in an environment begets more successful behavior. You start distorting the signal, then you get more and more dysfunctional behavior in response to the distorted signal.
Look around you. Start analyzing what is going on in terms of Skinnerian behavioral conditioning. What signals are actually being sent by the environment? What are the responses?
Urban decay is predominantly a function of people responding to the wrong signal, and of idiots sending the wrong signals. You don’t want homeless people crapping on your streets? Why the hell are you preventing the cops from dealing with them, and why are you subsidizing their maladaptive behaviors?
People do not examine what causes all this crap; instead, they rely on sending “messages” and platitudes, instead of looking at what the hell is actually encouraging and outright causing the behavior in the first place. You don’t want people using drugs and wrecking their lives? Why the hell are you making it easier for them to shoot up? Why are you shielding them from the natural consequences of their poor choices and bad behavior?
It’s all the same, everywhere. You wonder why schools are screwed up? Look at what the cues are, what the signals are; people are being rewarded for the wrong things, teachers and students both.
What is most aggravating is that few bother to think of these things in such terms. The politicians never, ever consider what they’re really doing with their actions. You say “We’re gonna spend a billion dollars a year on the homeless…”, thinking that is saying something about your generosity and human kindness. What you’re really saying is that there’s a billion dollars of free sh*t going up for grabs, and you’re really gonna reward the snot out of people behaving as parasites. Oh, and also, screw the working people who you’re robbing at gunpoint for the money to fund all these generous things you’re doing with their money…
Kirk: I think you’ve missed the inherent sarcasm, there.
Quite possibly. Your posts are normally long, so it is easy for a simple soul like me to miss these subtleties.
Seriously, though, it is worth noting that the ills of modern banking have been mestasising for decades. Dammit, as far back as the early 19th century, trouble was brewing with banks that lent aggressively. Bank runs were staple background/plot lines of novels. What has changed today in my view is the idea that somehow clever people can make them go away. Mind you, maybe, just maybe people are starting to realise that certain fundamentals of banking cannot change just because of new technology.