Trying to cut the Gordian knot of financial instruments

Citation

Bruce, R. (2001), "Trying to cut the Gordian knot of financial instruments", Balance Sheet, Vol. 9 No. 4. https://doi.org/10.1108/bs.2001.26509daa.001

Trying to cut the Gordian knot of financial instruments

Trying to cut the Gordian knot of financial instruments

It has been a revolution which has never been properly understood by the outside world. The transformation of the balance-sheet by the use of financial instruments has been one of the most remarkable recent changes in the financial world. But change is always difficult to keep track of or to measure. And that is what standard-setters, preparers and users of banking accounts are attempting to do across the course of this year. It is not easy. The complexity and inter-dependency of many of the issues have resulted in a tight tangle of Gordian-knot proportions.

So at the heart of this issue of Balance Sheet is an attempt to throw light from several different perspectives on the problem. At the beginning of the year, in Balance Sheet Vol. 9 No. 1, the main protagonists from organisations like the Bank of England and the Joint Working Group set out their stall. So too did Paul Chisnall of the British Bankers' Association. In many ways this is the key organisation at the heart of the debate. So it is good in this issue of Balance Sheet to have Paul providing the BBA's considered verdict on the proposals. As you might expect, it is a careful and reasoned analysis, suggesting that in dealing with issues as complex as this it would be better for the rules to evolve than to have a full-scale revolution.

Meanwhile Graham Allatt, the great guru of credit risk at Abbey National, looks at how the rules would impact on the risk management, lending policies and pricing of banks. As he tactfully puts it: "From a risk management perspective the so-called 'law of unintended consequences' is likely to hold sway".

Holding the ring in disputes between banking and financial services organisations and the standard-setters are the great global accounting firms. So to round off our analysis of where we go from here are the thoughts of Allister Wilson and his technical team at Ernst & Young. Wilson has built up an enviable reputation in recent years for pugnacious statements backed up by reasoned analysis. And so it is with the thoughts of Ernst & Young. They provide a way in which fair value and its strengths can be employed but without banks feeling that their figures have been reduced to nonsense.

In the mainstream of Balance Sheet's coverage this issue is led off by Bill Robinson's thoughtful column. This time he takes the vexed question of public/private partnerships as his topic and shows that correctly measuring the risks involved brings you to a more sensible conclusion on the price that should be paid.

Then a research team from Dundee University, under the sponsorship of ICAS, the Institute of Chartered Accountants of Scotland, takes us through the results of their latest work. This took the attitudes of UK managers towards risk as its theme. The results are startling, and slightly depressing. UK managers, the team suggest, are more inclined to worry about loss aversion than risk aversion. In a thoughtful piece they spell out the consequences of this attitude.

Tarlok Teji and Malcolm McCaig of Deloiitte & Touche take up a similar theme, as they examine how risk management systems can increase the value of an organisation. "Many chief executives, when it comes to risk management", they argue, "seem to be talking a good game. But when you scratch under the surface you find few who have truly embedded risk management firmly within the culture of their organisation." Enough said.

Anthony Carey, who will shortly step down as director of the ICAEW's Centre for Business Performance, was a key co-ordinator of the group which created the Turnbull Report. So he, and his colleague Jonathan Hunt, are well-placed to argue that audit committees are under pressure. In their analysis they show that financial services organisations are in particular peril. Once again they advocate the principle of embedding the process to produce the results required.

It must sometimes seem to those working in the financial services sector that the rate of change is raised on a monthly basis. At a recent conference a straw poll was held. People were asked how many of them were working for the same organisation as a year earlier. Very few were. Part of the problem was the rapid system of takeovers and mergers. They might be doing the same job in the same place. But they were doing it under a different banner of ownership. Jeff Neagle has made a study of motivation during times of extreme change and has applied it to the financial services sector. So we are proud to publish his results. Cutting the Gordian knot of the issue of financial instruments might feel easy by comparison with the issues which he is brave enough to raise.

Robert BruceEditor