Editorial

Citation

Bruce, R. (2001), "Editorial", Balance Sheet, Vol. 9 No. 3. https://doi.org/10.1108/bs.2001.26509caa.001

Editorial

There is a worrying feeling at the back of bankers' minds. Is that the sound of the drumming hooves of a succession of liquidity crises that they can hear in the distance? And is it becoming inexorably louder? This issue of Balance Sheet is largely devoted to providing the much-needed background thinking required to answer those questions. And, more important, how to deal with any coming crisis.

First our banking correspondent, Caroline Merrell of The Times in London, takes a look at the aftermath of the Basel Accord. Not only does she report on the responses from Europe's bankers, but she also makes some bold predictions of how banks, both retail and corporate, are likely to have to change their businesses as a result. There are some far-reaching implications. This analysis provides a firm platform for our main theme of liquidity in this issue of Balance Sheet.

So the central section of this issue is opened by David Clementi, Deputy Governor of the Bank of England. Here he sets out his views on consolidation in the marketplace and assesses proposals on capital adequacy and Basel. But he reserves his deepest worries for the innovations that he sees in the banking industry. He puts his finger on the central issue. He worries that "some participants in this market may not fully understand, or may have differing understandings of, the transactions into which they have entered; and about how the courts in some countries would treat these agreements". Innovations in systems, he argues, can pose new risks as well as blunting old ones.

Then we turn to a huge piece of analysis that Bob Falconer at ABN AMRO has carried out across the banking industry. He presented the initial findings to the conference of the UK ALMA earlier this year. Now he has widened its scope and its findings. It shows that the structural liability of banks varies enormously. And he argues that, even with a profound understanding of what is happening within their own bank, asset and liability professionals need to accept that liquidity crises are very difficult to predict or control. He ends his work with a quotation from GK Chesterton: "This world of ours looks just a little more mathematical than it is; its exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait". Falconer's research and findings are of immense importance as a timely warning.

Next the lawyers have their say. Ruth Finch specialises in asset and liability matters at lawyers Tite & Lewis, a stone's throw from St Paul's Cathedral in the heart of the City of London. Her perspective on Basel and all that it means is refreshingly different. And her conclusion cannot be escaped. "The message", she says, "is that there is a considerable amount of work to be carried out and that banks must start that work now".

After that we return to the roots of contemporary risk management. Anthony Carey was project director on the great Turnbull report on risk management. In his article for Balance Sheet he returns to that report, charts its effect on the world of banking and financial institutions and suggests how the ideas can now be developed. Carey is a worrier. Like a terrier he wrestles with the bones of risk until he finds an effective solution. "Financial institutions", he says, "must take risk, but they must do so consciously". And that reaches the nub of all the arguments about financial institutions and risk. "It is", concludes Carey, "a challenging agenda".

After that series of articles focusing on the issue of liquidity the rest of this issue of Balance Sheet pulls back to reveal the bigger picture. One of the most influential books published this year is The ValueReporting Revolution: Moving Beyond the Earnings Game, by Robert Eccles, Robert Herz, Mary Keegan and David Phillips. So Balance Sheet is proud to publish an extract from the heart of the book in which the authors take a look at the dilemma of risk management and risk reporting. As you might expect from a team based then with PricewaterhouseCoopers, the largest accounting firm in the world, they conclude that the gap between improving risk management techniques and risk disclosures needs to be closed.

Then one of the most original and thorough thinkers in the risk management world, Vicky Kubitscheck of AEGON UK, provides a comprehensive survey of current issues in the area of business continuity planning and argues that more attention should be paid to the enterprise risk model.

Abby Kyte of SunGard provides Balance Sheet with a comprehensive case study on the recent experience of the Newcastle Building Society and its efforts to transform its financial planning and forecasting systems.

And last, but far from least, Richard Fisher of Robert Walters provides our regular survey of salaries in the world of asset and liability management. He identifies the key factors influencing trends in the marketplace as a combination of globalisation, sophisticated procedures and the need to retain staff in a volatile market.

And that is really where we came in. The paradox of all the work in this field is that the more risk is understood and attended to, the more volatile the world seems to become. Liquidity is all. But there are still sleepless nights ahead for all of us.

Robert BruceEditor