Those who compare the financial sector to the gambling industry show little understanding of either. Whereas casinos, bookies and the like carefully manage their level of exposure to potential loss, the banks have opened themselves right up to the most extreme of downside risks – the so-called ‘black swan’ events popularised by Nassim Nicholas Taleb.
But that’s not the only difference, as John Kay explains in another insightful piece for the Financial Times (also available here on his own website). Banks, like casinos, aren’t just exposed to the risks attached to external events, but also to the dangers of internal malpractice – as Bob Diamond found to his cost:
John Kay’s point is that in the gambling industry, unlike the banks, the top brass know that they will be held responsible for the misdeeds of their staff:
Kay provides a brief history of casino regulation in the UK, observing that it was ultimately to the benefit of the industry:
In other words, in a British casino you gamble on the turn of a card, not on the honesty of the croupier – proof that the right kind of regulation can smooth the way rather than getting in the way.
Of course, the wrong kind of regulation has the opposite effect. Instead of establishing minimum standards and clear lines of responsibility, it concerns itself with process not outcome, red-tape not responsibility. Good managers are burdened with paperwork, while bad managers are furnished with a range of convenient excuses: ‘we complied with standard procedure’, ‘we ticked all the boxes’, etc.
Instead of elaborating ever more complicated sets of rules, the way forward is surely to make those in charge straightforwardly liable for what they are in charge of. Noting Bob Diamond’s reference to what happened "on my watch", John Kay concludes that banks, like casinos, should be run like the Royal Navy:
Aye aye, to that!