Simplicity is the ultimate sophistication…

Was famously quoted by Leonardo Da Vinci. Mr Klaas Knot, President of the Netherlands Bank talks about need to simplify finance.

He said regulations should also be worried about banks becoming too complex to fail:

In existing and new regulations, including the forthcoming Basel III framework, regulators have focused on the problem of institutions being Too Big To Fail. This is because of the pressure that having to rescue financial institutions has put on public finances.

But, actually, we should be more worried about banks being Too Complex To Fail. If institutions are too complex, it’s even more difficult and therefore perhaps more expensive to resolve them.

The need for change is obvious. And responsibility for this change lies in your hands, too! I see three areas where you can contribute to achieving this change.

First of all, banks’ business models must not be unduly complex. In the past, we have seen financial institutions offering lending services, participating in trading activities, setting up joint ventures and combining their activities with insurance companies or businesses outside the financial sector…..

A second way to increase simplicity and transparency in the sector is to simplify the internal organization of financial institutions. The financial sector in general, and banks in particular, can be seen as one of the most complex areas in today’s world. But we all know that complex organizations are hard to manage….

Thirdly – and this may be the most difficult one – people working for financial institutions need a prudent mindset. It’s ironic, isn’t it, that, instead of using sophisticated financial risk models to identify risks, “smart” people in the financial sector used these models to circumvent financial regulation.

Remember the trend towards moving exposures off balance sheet? What about the way benchmark rates were manipulated, and separate legal entities were used in the shadow banking sector? This behavior was obviously encouraged by the fact that variable benefits were based on achieving short-term results. 

He says things are changing but am not sure…It is just getting more and more complex. Apart from banking getting complex, surfeit of regulations not helping as well…so even if some banks want to simplify they are finding it tough..

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: