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While this may be a little tangential to the normal run of posts here, to me managing regulatory risk is one of the things that any good risk manager has to do. Understanding the abilities and restrictions that the law has is an important part of that.

Over the last few months I have been putting the occasional post up here on what I feel is wrong with a lot of the regulatory framework. Skepticlawyer, being the very good lawyer she is, has done it better.

Legislation has two limits. One is practical (call it a ‘means-end’ limit). The other is principled (call it a ‘normative’ limit). Most philosophers spend all their time arguing over the latter: John Stuart Mill’s ‘harm principle‘ represents an attempt to get at what a principled limit on the powers of legislation may look like. This is philosophically interesting and forms a major part of my DPhil thesis here at Oxford. In the case of conservatives and social democrats, however, both groups engage in major legal wish-fulfillment: they think they can ignore ‘means-end’ limits. That is, they seem to think that passing a law will make it so. If wishes were horses, people, beggars would ride. They think they will, for example, be able to make abortion illegal (or greatly restrict access to it) with no social or economic comeback, or impose salary caps on business executives without hemorrhaging talent overseas or to other industries.

This is in the context of a piece on the Left in Australia – but the second half of the piece goes on to more general issues and it is this section of the post I would encourage you to read. It starts at the third paragraph after the blockquote in her piece.

A fairly late night for me – just finished this webcast (sorry, slides only ATM – they are releasing the webcast later). While the IASB were pitching this as a bit of a status update, they could not help but give some interesting pointers on where they are going and, as a result, what issues they feel fairly strongly about.

The main issues identified in the recent ED were:

  1. There seems to be a fair amount more clarity needed about the instruments that were to be allowed to be treated as amortised cost – the wording about “basic loan features” was considered a bit woolly.
    I would agree – but to me this should be able to be handled in some application guidance not in the main standard.
  2. There remain a number of questions around the own credit rating issue – if you fair value your own traded bonds you are implicitly including your own credit rating. This issue seems to be rather thorny. It may not go any further in any case as the IASB seem to be backing away from this, calling the method “not decision useful”.
    I would disagree – the issue is not difficult. An entity should not be able to recognise any possibility that it will not be able to meet its obligations as and when they fall due in any way, shape or form. This is a violation of the going concern principle.

Other issues covered were:

  1. Progress on the impairment model seems to be progressing – the use of an expected loss model seems to be one of the barrows the IASB are pushing, with the difficulties seen to be more around cost and practicality than general principles.
    They are proceeding to establish an experts advisory group to advise them on operational issues, application guidance needed and to facilitate field testing.
    I may have misunderstood here, but I do have a problem with this and on several levels. For anyone other than a very large corporate or a sizable bank this is not cheap to do. In Australia at least, this standard applies to all entities, so this is likely to be a significant cost.
    The other main problem I have is one of the whole principle. An EL model is inherently forward looking – yet a “Statement of Financial Position” is a point in time concept and an income statement is (by definition) backward looking. To me, the current impairment method is one of the strengths of IAS 39. Making it easier would be good. Violating the whole principle of financial statements is not. This seems to be one of the areas that the BIS would like to see in – but I have given my opinion on that before. I will be keeping a close watch here.
  2. Our old favourite of hedge accounting got a good look in as well, with an ED likely to come out in December. The changes here may well be extensive, with the IASB looking to simplify cash flow hedge accounting and making the fair value method more like the cash flow hedging. This could be achieved by changing it to have the hedged item left at amortised cost and changes in FV of the hedging instrument going through OCI.
    One word here – “yay”. If you want some more words – I have dealt with many clients that just gave up on this whole area – sometimes on my advice – as it was just too difficult. Changes here (the FAS 133 shortcut method, please and at first impressions I like the possible new FV method)  would be very good.

The other areas that were discussed were the likely effects on the upcoming insurance standard(s), particularly WRT to 2 above;  the possible removal of the cost exemption for instruments that are difficult or impractical to value and some consideration of what to do with these in interim accounts.

The IASB will be moving to weekly board meetings to try to get all this done in the timescales they have set themselves. Personally, I think this may be a sign that they are preparing to slip the deadlines.

The questions period was short – and the IASB wanted only process questions – but they could not really help themselves on a couple. The best question though, was on the convergence between IAS 39 and FAS 133, in that they both have very different timelines for releases but both are saying they want to converge. All I can say is “get on with it guys”. One standard (as long as it is simple and makes sense) is much, much better than two (or more).

Just for those particularly interested in where IAS 39 is going (OK – you do not need to admit it by putting your hands up). The IASB will be holding a webcast on how they are going:

On 23 September 2009 the staff of the IASB will present two identical webcasts on the project to replace IAS 39. The webcasts will be held at 11am and 5pm GMT. The webcasts will address the following:

•an overview of the feedback received on the Exposure Draft Financial Instruments: Classification and Measurement, the Request for Information – impairment of financial assets and the Discussion Paper Credit Risk in Liability Measurement ; and
•the next steps in the project to replace IAS 39 taking into account the discussions at the September Board meeting
Both presentations will be followed by a Q&A session where registered participants can submit questions via the online facilities.

If you are interested, try attending. It is unlikely to be too exciting*, but it may well be worthwhile.


* …by design – one thing you do not want is too much excitement when discussing accounting standards.

Putting together a blog cavalcade was an interesting task – and one that took a fair bit longer than I expected. Not, I might add, because it was a painful one, but because there was so much to read and so much that I had not covered – focussing as I do on banking with the occasional foray into insurance along with the occasional amateur foray into economics.


The quantity of posts on health that were submitted was interesting. Living in Australia the issue of health insurance is not a big one. The idea of being bound to an employer’s health plan is an interesting one, so the issues that arise from this – in particular where the employer has to choose a plan caused me to think carefully. While this post read a little like an advertisement for “Best Doctors” I did have to stop and think.

Being a little late, as I am, in posting this at least let me look at the latest stff out there. One post from the Cav’s organiser (Henry Stern) just popped up with a question about the US health system and where it is headed. Given how much you guys in the States are paying I am not surprised you are looking at alternatives, but, to (hopefully correctly) paraphrase where Henry is going, just because you need a change and that what is proposed is a change does not necessarily mean that the change that is proposed should be adopted.

To go with the slightly Australian flavour, though I should note a recent controversy over here – whether midwives should be able to attend home births and be covered by insurance for doing so. To me, it flows on to the question in the next section – whether perceptions of risk become the guiding methodology, rather than the facts of the matter. This is backed up by a piece from Colorado on home births.

Risk Generally

I found this post, while short, on risk response to be interesting – why do we sometimes respond to risk in an illogical way, taking the “safe route” rather than the one that is more likely to give the desired outcome? Perceptions of risk are often, but not always, wildly different to the actuality.


One of the warnings I received on agreeing to do the Cav was against posts on credit cards. Sorry – but I will have to make one exception. This one talks about the popularity of credit card default insurance – and why you probably do not need it. This has always been my perception of this type of insurance, so I thought it should be added to.

The TARP bailout has been fairly big news all around the world, with the US government pumping huge funds into the banks. I have always been a skeptic on this sort of action, but some hard data can cause me to rethink. I am not persuaded as yet, though.

One possible option for the future was canvassed on BankWatch – make the banks a lot safer than the current ones. I am not sure exactly how to enforce it, but it is a good thought.

To get through all this, some general advice is sometimes handy – this post gives some very general advice on possible strategies. I particularly liked the last one on sorting out an exit strategy. It is always a good idea to have a backstop. More advice comes from the Digerati Life – and again, the last one is the money quote. If you are thinking of trading it is worth a read.

I can’t leave without giving a little plug to one of my favourite bloggers in Kenya – Bankelele. His series on the use of mobile phones to make payments in Kenya has been very interesting.


Given this is a risk cavalcade, I was surprised that there was so little (read: nothing) on general or life insurance submitted. Other than health insurance, there does not seem to be a lot out there. Perhaps readers can direct me to some useful ones in comments? Perhaps a brief look at an alternative may help.

To sum up – thanks to Hank for the oppotunity to do this. It was certainly interesting.

I posted a comment on another blog a little while ago and, as it covers my (current) position on the question of whether bank deposits are money, I thought I would repost it here (after tidying up the spelling).

This one largely follows an old post here – but does expand in some ways on it.

I do not want to labour this point and I would be the first to say that my opinion is not in full agreement with the mainstream of economics. It does, however, come out of a long history of working in bank treasury functions in several parts of the world.
The question of whether or not banks create money revolves around whether or not a bank deposit counts as “money”, properly so called. Personally, I doubt it is, as I cannot conduct payment transactions with my bank account – I need to be able to withdraw the funds first. This is a contractual question between me and the bank. Most of the time the bank will honour the demand to pay the funds, so under most circumstances the funds in my bank account are a close cash substitute and can therefore be regarded as money, and I agree with Mark above on that. In extremis, though, the bank may not deliver the funds – so bank accounts are clearly less liquid than cash. That situation is only likely to occur when the bank itself cannot deliver on the demand for cash – i.e. there are more demands for withdrawals than the individual bank has access to cash to meet those demands.
Really, then, the total pool of liquidity represented by any bank is not the total amount on deposit with the bank, but the (much smaller) amount they have in ready cash or other sources of funds to meet calls for withdrawals.
You are right that a loan disbursement (or deposit withdrawal) from one bank will often, even usually, result in a deposit with either that bank or another – but this is generally not immediate, so the withdrawal or disbursement is separated by time from any re-deposit, nor certain. It may be that the funds withdrawn are not redeposited in any bank for some time – they could be kept under the bed, used multiple times for transactions or even go offshore.
The point here is that a particular bank cannot be sure where any disbursed loan funds may end up and can only count on a small proportion returning. This means that they cannot simply inflate their balance sheet by making loans and counting on the funds to come back as deposits. Additionally, if they did this their liquidity ratios (one of the key measures of any bank’s soundness) would steadily deteriorate, restricting their ability to make further loans. Their capital ratios would also steadily deteriorate, reducing their ability to raise funds.
To me, then, the question of whether you measure the total money supply to include or exclude deposits in the banking system is really irrelevant. That may well be a standard (and useful) measure for economic policy questions. However, to me, the total amount of funds actually available for transaction purposesin an economy does not include bank deposits (whether chequing or otherwise) but does include total liquid funds (cash, government bonds etc.) held by the banks – a much smaller figure. It is not increased by the actions of banks in depositing and lending – in fact it is reduced by the amount of the solvency ratios.
I appreciate that this is not purely mainstream, but I know how these things operate in every bank I have ever worked in.
You may (OTOH) argue that, in the event of a likely bank failure to deliver due to insolvency, the government is likely to step in – the (either implicit or explicit) “printing press” contingency. That may well be so – but if you are going to count the likelihood of the government stepping in and printing as part of the money supply then that should be explicitly acknowledged, not implicitly included by counting all bank deposits. That then becomes further government created money, not bank created money.

I received an interesting piece of blog spam a couple of days ago and, because of the content instead of deleting it I decided to do some digging. This was the text of the spam:

I’m happy to describe at this page an interesting kind of making money. Can you imagine that one can earn up to 3% a day through investments without limitations in without sum limits? I. e. that even having US$1.000,00 one can make the same money in a monthly!

If someone is interested welcome to visit my web site http://www. theinvestblog .com.

I have removed and doctored the link in the spam as I really do not suggest that you follow it. It points at this page.

While I do not have any idea of what this company is it bears all the hallmarks of a classic Ponzi scheme. It offers “guaranteed” high returns (between 1.2 and 3% per day), the investment strategy is vague at best and self-contradictory at worst, with the front page implying that they are investing in (UK) AIM listed shares and the “Our Strategy” page saying it is “…quality and high yield investment into different international financial instruments…”.

They are based in Panama, apparently for its “…political and economic stability…” and its name mimics some of the more reputable investment managers in the UK – notably its namesake, the AIM Trust plc, with which it does not seem to be associated.

Again – I do not know if this company is definitely a Ponzi – it may be perfectly legitimate and earning these sorts of returns by really good investment management – but it certainly looks like one. The use (and abuse) of the English language on the website is neither here nor there.

If you go to the site and decide to put some money into it do not claim that you have not been warned.

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