Couple of days ago, I found myself in a rather nauseating meeting. I had highly anticipated the conversations that were to take place and had hopes of glancing into the workings of our asset and liability management department. What ensue though was just a recap of my junior class in high school. The topic under discussion was a new modeling technique that presumably would optimized our liquidity profile by analyzing the lifecycle of our demand deposits which the current model did not do.
I was shocked to hear this, that our current model was mainly just crap, but alright. Then the discussion moved forward and we all agreed that this would result in a more precise calculation of our liquidity coming from our core liabilities. Unforeseen though was the problem of explaining the process to business – the controllers of retail banking for example.
We came to a complete halt because of the fact that the managers in the meeting could not find a plausible way of explaining a simple ARIMA model for forecasting due to its ‘complexity’. I really thought they were fucking kidding me. Juniors in high school brush over this type of modeling in a week’s lesson yet the bank is unable to move forward an improved concept due to fear of the resources’ inability to comprehend it.
One finds these situations constantly throughout the bank. A change is needed due to improved processes and new findings; yet the majority stands their grounds in defending old ideas and apprehensive about creating the new necessary adjustments in their processes or learning curve. Those, as I have advocated in the past, are one of the ways that the frailties of a large organization manifest itself. In spite of what is studied in Business School concerning “economies of scale”, size hurts you not only at times of stress but at times of change.
There appear to be something with size that is harmful to corporations. Their longing for efficiency cause them to be blinded by these hidden risks. A project that is not useful for all is abandon at a whim in the name of the almighty ‘efficiency’, costing tens of millions of Euros. Yet they do not see that one problem somewhere could jeopardize the entire project -as the projects are weak just as their weakest links. It is as if their mental states harbors an ingrained model error. This nonlinear fragility will in no doubt be the end of this bank.