BIS on the crisis and remedies

"And, in the future, a financial firm that is too big or too interconnected to fail must be too big to exist."

The Bank for International Settlements Annual Report is probably the only one that I read regularly for its content, rather than mine it for data. It contains authoritative interpretation of recent economic and financial developments, and is thus an important source of consensus narrative. This year's report is no exception.

Of particular relevance going forward is its chapter VII, outlining the current thinking about capital requirements by evaluating a Systemic Capital Charge and a Countercyclical Capital Charge. However, these capital charges appear to continue to rely on portfolio theory's (stable?) correlations, which is conceptually flawed, as we now know. Nevertheless, it is encouraging to see that countercyclicality is addressed not with perceptional placebos such as modified accounting standards, but with measures aiming at the economic heart of the matter, namely leverage and the capital base. Last, but not least: if Too Big to Fail were a victim of the crisis, it would have been worth it.

Victims IV: The real crisis

The Economist deserves praise for having featured a special report on the impact of ageing populations in this time of crisis, which overrides longer term requirements with its fiscal profligacy. The majority of industrialised countries were already on an unsustainable fiscal path before the crisis struck. It is difficult to see how government finances will ever be able to return to a trajectory that is stable longer-term.

It goes without saying that the foreseeable instability of public finances has a dramatic impact on capital funded retirement systems. At this juncture, the jury is still out on the prefix of instability, i.e. whether we will see inflation or deflation. Either way, the contradictory demands on the investment strategy of individual funds are anything but trivial and may need to be implemented consistently in very short order once the dust settles. Scenario analysis and preparation is the name of the game. I look forward to a workshop producing a Shell/Oxford-method scenario analysis on Switzerland 2030, to which I have been invited by the federal crisis management education unit.