The difficulties in the US banking system rumble on, with First Republic succumbing earlier this week and PacWest teetering even as we write this. The most sensible commentary we’ve seen on the situation is from Richard Bookstaber in the FT, who points out the weakness of a rules-based approach, or “oversight based on unnumerable detailed rules”. He notes: “we don’t fail because of mismeasurement at the second decimal point or a poorly drafted subsection. We fail because our regulatory approach misses material risks wholesale.” As our financial and regulatory systems have barrelled a long way down this overly prescriptive and flawed route, and following the period of perhaps the loosest money in history, sadly we feel this might rumble on for a while yet.
Experiencing risks unseen in decades (such as the return of inflation) or never before (the climate change transition, the hangover from the period of the easiest money in history), investors will have to be more imaginative in managing risk and opportunities, thinking beyond merely what has happened in recent times.