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Irish banking experts report talks of “bandwagon effects”

Just when you thought you understood the slew of new terms born out of the global economic meltdown (“quantitative easing”, “stagflation”, “short-selling” etc), a new Report muddies the waters.

Rather than naming names, the March 2011 Peter Nyberg report “Misjudging risk: Causes of the systemic banking crisis in Ireland” throws up a new range of terms to help define what happened. 

Finnish banking expert, Peter Nyberg was appointed by the Minister as the Sole Member of the Commission and is fully responsible for the contents of the Report. The Commission’s expert investigation team accessed approximately 200,000 documents from the authorities, financial institutions and other sources.

The tone of unplain English is set in the Executive Summary: “In explaining the simultaneity of the failures in Irish institutions, the Commission frequently found behaviour exhibiting bandwagon effects both between institutions (“herding”) and within them (“groupthink”), reinforced by a widespread international belief in the efficiency of financial markets.”

In a much needed Glossary, “herding” is defined as “the willingness of investors and banks to simultaneously invest in, lend to and own the same type of assets, accompanied by insufficient information gathering and processing“.

“Groupthink” is defined as “a psychological process that reduces the likelihood of critical views being expressed or heard within institutions, due to a desire for unanimity which overrides the motivation to realistically evaluate alternative courses of action”.

“Paper wealth” is defined as “wealth as measured by monetary value (which may fluctuate), reflected in the price of assets at a particular time”.

“Light-touch or Principles based Regulation” is defined as “non-intrusive approach to regulating financial institutions, based on the “efficient market” hypothesis”.

“Disaster myopia” is defined as “A tendency over time to underestimate the probability of low frequency shocks (i.e. “low probability / high impact risks”)”.

Not surprisingly, given this high level of psychobabble, The Wall Street Journal expressed disappointment with the findings. “The Nyberg Report, which names no one but blames everyone, falls short of explaining what went so wrong inside the Irish banks.”

According to the Plain English Campaign, “Using jargon and gobbledygook is a perfect smokescreen for a lack of knowledge, unclear thinking and defective information. The resulting ambiguity and confusion provides a breeding ground for lies, exaggerations, misinterpretations and a convenient hiding place for trouble.”

Recalling Sir John Pentland Mahaffy’s immortal line “In Ireland the inevitable never happens and the unexpected constantly occurs”, The Report makes a remarkably similar observation and recommends the following lesson to be learned from the Irish Experience.

“As already noted above (Section 1.4), emergence of a systemic banking crisis requires that a number of important safeguards all become ineffective simultaneously. The likelihood of this is not large, since some part of society and the banking sector is likely to remain vigilant even if other parts do not. However, as has been seen in a number of countries and regions before, at times the unlikely occurs.”

If you need further clarification the full report is available from The Department of Finance here.

http://www.finance.irlgov.ie/viewdoc.asp?DocID=6799

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