INARM

Some of the readers of this blog may know David Merkel, CFA, FSA in person. Did you know he publishes a blog?

The Aleph Blog has been David’s brainchild since early 2007 and contains his musings on “teaching investors about better investing through risk control, and tying all of the markets into a coherent whole”.

While not all of the posts written by David are directly relevant to the actuarial community, only in the general informative manner, one of his most recent posts is:

With banks, the grand weakness is in the assets, and the analysis should focus on two things:

• Liquidity of the assets versus liquidity of the liabilities.
• Potential credit losses of the assets versus the surplus of the bank.

I write this because of the commentary of Taleb and Bookstaber.  They are bright men, but they have never managed the risks of a financial institution.  Leverage ratios are not enough.  One must dig into the loss experience and analyze whether emerging losses might overwhelm the capital of the institution.  One must also look at risk-based liquidity — what is the likelihood  of running out of cash?

There is always a tension between rules versus principles.  What must first be admitted is that both can be fuddled by sinful men.  Rules can be observed, and cheaters bring items that meet the letter of rules, but violate the spirit of the rules.  Principles can be bent by those that implement the principles.  Neither is a perfect solution — better to settle on one way of regulating, though, and understanding the soft spots, than to vacillate.

Perhaps the banks need to employ actuaries.  I don’t say that so that friends might find work, but because many banks do not get how to preserve their existence.  Actuaries think longer-term; they think about scenarios where loss experience might prove to be unsustainable.  They are more skeptical on risk compared to most bankers.

I invite you all to periodically browse through David’s blog.