Opinion: Banking on the unknown | News

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The Housing Finance Network

Opinion: Banking on the unknown

By Alistair McIntosh, HQN CEO.

Let’s hear it for our plucky finance directors. Why is that? Well this is the time of year they’ve got to send their business plan projections to the regulator.

Good luck with that! In days of yore the finance directors would crunch the numbers on a well lubricated double-headed slide rule, or a pocket calculator (with built in mini-printer) and more recently on whizzy computer models. Sadly, these tools have proved utterly useless.

As we lurch from crisis to crisis the projections have been about as accurate as a VW emissions test. What should we do?

We need to borrow the machine the Government uses for the Premium Bonds. Send for ERNIE. In case you don’t know, that stands for Electronic Random Number Indicator Equipment. It’s got as much chance of picking the right data as the Bank of England. I only hope you get as many shots at it as they do.

They’ve been pumping out their stress tests alongside other unsolicited advice for years. And they’ve nearly always got it wrong. But like Sisyphus they just keep at it. The Bank told us to get ready for rampaging inflation… that never happened, did it?

In fact, CPI has gone in the opposite direction. While other bits of Government were worrying about pandemics ahead of time they kept the Brexit blinkers on. Hopeless.

Years ago I spoke to a punter who was bemoaning the lamentable performance of a racing tipster. He was complaining about the then retired but previously highly successful jockey Lester Piggott.

Turns out the great man could ride around 4,500 winners, including nine Epsom Derbies but he couldn’t pick a horse for the papers to save his life. “Lester couldn’t tip s**t” was the way my guy put it. But at least he was accountable. By contrast the Bank is slippery.

It is true that they do give one figure for their prediction of e.g. CPI and GDP. And they state their reasons. But they also show fan charts that, among other things, illustrate where the figures could lie if the Bank hasn’t called it right. You could say they are hedging their bets. Or to put it another way CPI could go up, down or sideways. Why does this matter? As you will be only too well aware that CPI figure underpins your scope for rent increases. Bluntly, I don’t see 2.5% hikes on the horizon anytime soon.

What is the way through all of this? You still have to use your skill and judgment to send in the projections to the regulator. A briefing paper by Adrian Jolliffe offers some pointers on the assumptions to plump for. But you have to work on the basis that real life will scatter your best laid plans to the four winds. How do you fix that?

The Institute of Chartered Accounts in England and Wales (ICAEW) may have the answer. Of course they are worried about all of this uncertainty. And they are also concerned about the prevalence of poor quality audits dragging their good name through the mud. So they are ordering auditors to ask for evidence of reverse stress testing.

In a nutshell they want you to pinpoint the loss of cash that would torpedo key covenants and the business plan. Then you work out how you would get back on track as a going concern.

Dreaming up a stress test that you can mitigate easily with a few pain free measures doesn’t cut it anymore. Send those projections down the wire to the regulator ASAP. Then get onto the reverse stress testing.

God knows what the next crisis will be, but the Bank of England certainly won’t see it coming. That’s your job.