If I kept crashing my car, I might well decide that I needed to keep a bigger chunk of cash available to repair it, but I would also consider whether I needed to improve my driving.
Following the same logic, regulators’ efforts to force banks to hold more capital to guard against operational risk seem to me to address only half the issue: the other half is about ensuring basic management competence at financial institutions.
As Brooke Masters writes in Monday’s FT:
Operational risk covers almost any problem – bar trading losses, bad loans and legal cases – that could damage a bank, such as the weeks of computer problems at Royal Bank of Scotland.
Yet while it may suit banks to characterise some of these operational risks as bolts from the blue – interruptions to the smooth running core business of making money from money – the truth is that most of these incidents start with simple mismanagement. Read more