There’s Risk Analysis and Then There’s More Risk Analysis

It must be that all the gloom in the financial sector is bringing out the gallows humor in me, because I had to laugh at this follow up on the "war games" stress testing in the British banking sector. First the Financial Times reported that risk analyses stress tests applied by regulators to British banks had accurately predicted the 2007 failure of several banks. Now the Telegraph has reported that after cracking down on lavish bonuses for bankers,  the Financial Services Authority, the country’s bank regulator,has paid out  about $147 million in staff bonuses–which amounts to about a 40 percent hike in its payroll costs.  
The Financial Services Authority defended the additional expense by saying that the heightened demands on the agency in 2008 required it to hire an additional staff 250 members–and 250 additional copies of whatever Monte Carlo software the agency uses?–and to pay for more highly skilled staff. 

Remember that in 2004, with some scary reports of operations risk in some troubled banks, the regulators, apparently unable to face decision making under uncertainty on its own part, failed to crack down on the practices that eventually bought down several banks in 2007. Their answer to the accelerating crisis was more people with more statistical analysis skills.  Apparently, however, more risk assessment doesn’t necessarily correlate with better policy.  There’s risk analysis and then there’s more risk analysis. 

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