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and I got to thinking: if during good times being in certain positions of responsibility is an unchallenging job, how do you ensure that people with the necessary skills and resolve (not necessarily individually, but certainly collectively) are where they need to be in a time of crisis?

A military analogy would be, how do you maintain combat-readiness in your defence forces after two generations of peace? And if you don't, who do you turn to when the unthinkable happens and you're invaded?

The military does it with drills and war games, and I could well imagine that this might work for a central bank/financial regulator as well. Every quarter, the ministry of finance would make a scenario in which a Charlie Foxtrot of random severity occurs, ranging from the insolvency of a small bank all the way through to systemic insolvency coupled with a run on the currency.

For maximum effect, you'd spring it on the financial regulator on a random day in the quarter, and the financial regulator would game out the scenario. The disadvantage of that approach is that, unlike the military in peacetime, the financial regulator has a day job. So running unscheduled exercises is going to be a real pain in the ass. It may be more sustainable to pick a long weekend (i.e. a weekend where Friday or Monday is also a bank holiday) somewhere in each quarter and hold the exercise then. Or simply cook up an exercise for each long weekend in the year.

If they pass an exercise, its weigh in the random draw is reduced, so the exercise schedule becomes biased towards the sorts of exercises they need to get better at.

The big problem is, of course, that you'd have to get someone to design realistic scenarios - and since nobody among Die Seriöse Leute predicted this Charlie Foxtrot in advance...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Dec 3rd, 2010 at 11:39:52 AM EST
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