Post-Crisis Risk Management
Mr Oyama is a great friend of The Asian Banker, having spoken at various Asian Banker events over the last years, always to a warm reception. Having written in Japanese on the recent financial crisis, Oyama found a publisher for the English edition of this book with John Wiley & Sons. Oyama is an amazing person, having worked for 20 years at the Bank of Japan as the deputy director-general in Financial System and Bank Examinations, he’s also worked with the Japanese banks’ nonperforming loans problem, Basel II risk management standards implementation for Japanese banks, and has worked in global bodies such as the Basel Committee on Bank supervision, the International Monetary Fund and the Global Association of Risk Professionals.
What’s remarkable about Oyama is not just his great expertise in risk management, but his exceptional ability to communicate it in English. In fact, I’d say that he speaks more eloquently than nearly any native English speaker that I know. This eloquence shines through in his book, which is imminently readable, which sentence-by-sentence contains universes of boiled-down wisdom. The book is relatively slim, covering a great deal of territory over its 188 pages, which are followed by six pages of references to works cited, and a four-page index.
Just reading Oyama’s table of contents we get a clear run-down of the key issues in the current financial crisis, from its seeds (the pre-crisis summer of 2007, 2007, and the full-fledged crisis in mid-late 2008), an overview of its elements, reactions by governments and regulators, issues that set this crisis apart from others, reform of the risk management regime for banks, the Japanese and Asian perspective to the financial crisis, and a new conclusion that highlights significant post-crisis risk management issues. Early in the book he inspects lessons learned from the crisis that his country’s banks had gone through over a decade earlier, noting that high real estate prices had been the cause of both crises; but while attempts were made to solve the earlier bubble by introducing securitised products, the outcome was the same, if not amplified. “It is indeed an irony to note that lessons the system learned from the previous crisis have now caused another.” Lessons learned are a priority, and raison d’etre for the book, since fixing the problems now would lessen the impact of the next crisis. One of these lessons is solving the problem of information asymmetry, which, as we’ve learned from the case of Goldman Sachs creating investment products for John Paulson, is at the heart of how Wall Street works. Information sharing is counter to capitalist principles, no matter what people might pretend otherwise. But in the lead-up to the crisis with it many years of steady property-linked growth, the information asymmetry became less of a concern as there rose an overconfidence in the various risk management techniques used to counter this information asymmetry, and Oyama feels that the basics of risk management were forgotten easily. Model risk was often ignored, and there was an over-reliance on calculating value at risk, without thinking any further.
But Oyama also notes the difficulty of management of top banks to understand the scope of their businesses, and when UBS gave a unit called Dillon Read Capital Management, which specialised in alternative investments, a great deal of authority within the organisation, it seems that the existence of such an important and complex business that clearly operated outside of upper management understanding of the kind of risk such an institution could take actually pushed the limits of what a company can manage under one roof, as the business nearly sunk the company. A similar case can be made for AIA, which profitably underwrote credit default swaps until the size of the business it was doing collapsed over it. The situation made a mockery of institutions that employed PhDs and were supposedly good at risk management, even earning high qualifications under Basel II only months before their companies were shamed by risk management deficiencies brought on by the financial crisis.
Again and again Oyama comes back to information sharing, which includes the information sharing of bank solvency issues between central banks and regulatory agencies, the lack of which was evidenced in the Northern Rock problem in the UK when the Bank of England and the FSA suffered from communication breakdown. It raises the question of whether a bank and its regulator should be kept under one roof, whether they should work in tandem, or whether they may be separated. Data and information does seem to be at the core of everything in this book, and Oyama makes an interesting point about identifying visible risks and “invisible risks” that cannot be statistically measured (also known as “Knight’s uncertainty”). While top US and EU banks may be good at managing visible risks through analysis, Japanese and Asian banks have a conservative culture and have stayed away from activities that could contain invisible risks, or whose potential upside they could not understand or believe.
But Oyama also asks important questions about the role of the regulators themselves – instead of asking banks to build up buffers, what kinds of buffers are they themselves building up to prepare for the crises that they know will come? This is perhaps playing the devil’s advocate, which Oyama does well, as regulators should not be bank managers, and vice versa. He also advocates better market infrastructures that increase information quality and expand risk tradability, starting from the establish a framework to motivate third parties, such as ratings agencies, to increase the quality of their risk assessments, clarify the definition of fair value accounting, while also increasing the disclosure of risk information. There would also need to be a greater sharing of information between major global regulators, such as those of Japan and western countries, a problem compounded by both language issues and budget constraints. Oyama can well testify to this, being one of the few Bank of Japan staff who is comfortable speaking English, and also one who travelled constantly to promote the cause of greater information sharing and better bank risk management.
Complaints about the book are generally few. I feel the index could have been a bit beefier, and the book does feel a bit dated – sure, any book on a crisis cannot be fully current, but the fact that this is a translation of an earlier piece extends the dating one generation. Even as I read his words, I often wonder what he would have added about things that had happened after January 2008, which seems to have been the cutoff point of his original work; January 2008 seems like a million years ago, and a lot has happened since. But no matter – there’s always room for a Post-Post-Crisis Risk Management.
