Fine Beim me…

We recently published a series of posts on the topic of how to improve decision-making and the accuracy of forecasting probabilities and risks, so we were intrigued to come across a copy of the so-called “Beim Report” into the quality and effectiveness of the FRBNY’s risk and bank supervision at the time of the post-2007 financial crisis. The report, although now some 4 years old, is worth reading in full; and we attach the link below.

https://s3.amazonaws.com/s3.documentcloud.org/documents/1303305/2009-08-18-frbny-report-on-systemic-risk-and.pdf

Tellingly, it was meant to be confidential within the FRBNY, presumably because it highlighted a number of organizational and cultural weaknesses within that institution that implicitly may have increased and exacerbated the probability and impact of the financial crisis. We have no desire to criticize or second-guess regulators, whose task is both critical and often thankless. However, we think it worthwhile to highlight a number of themes and recommendations, because they tend to support the thesis that developed in our previous posts.

  • Reliance upon models and systems developed by others may be necessary in some circumstances, but unless one can be certain that the interests of those who created and developed them are aligned with one’s own, there is a real risk that one’s own judgment and assumptions will be affected by such reliance. In other words, there is a real risk that one’s thought-processes will frame questions in the same way, thereby reducing the vital element of independent and critical thinking
  • Avoid being seduced by processes and how they are conducted. Of course, processes are essential in many ways, but it remains important to understand them and to question their validity and relevance
  • Always remember the principal/agent dichotomy and whose interests are being served in any situation
  • Remember that it can be “too quiet”, in the sense that the perception of reduced risk or low volatility often presages the opposite!
  • Ensure that the comparisons and analogies you are making are relevant and valid
  • While achieving consensus is often valuable, avoid ideas being “vetted to death”. At some point, one has to make a decision, even if information is imperfect
  • Similarly, ensure that seeking consensus does not result in issues being whittled down, or controversies being smoothed over
  • Try to overcome the dangers of information asymmetry; and ask what may not have been disclosed and why
  • Be comfortable with your own judgment and with your opinions being challenged by robust peer-review
  • Speak truth to power

None of the above is in any sense radical or esoteric. Rather it represents a further exhortation to independent and self-confident but also self-aware and self-critical decision-making and risk assessment- which is fine by us!

-The Awbury Team

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