August is traditionally the month of financial crises. Or indeed just crises. Whether it's the latest euro zone aggro or Saddam Hussein's invasion of Kuwait, things seem to heat up in August and markets, like much of the working population of northern Europe, head south.
I used to wonder why markets experience such volatility in August and the answer used to come back that everyone is on holiday and trading desks are thinly staffed with juniors and risk managers of lower experience. Hence they can't handle falling markets or run bigger positions.
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This explanation generally satisfied me but just recently I've concluded that its nonsense. I don't buy it. Trading limits are limits, and whether the head of desk is sat there or the book is being covered by some spotty Herbert, that doesn't mean risk limits are reduced. And if banks need the senior executive to be in place in order to handle a crisis, well that speaks pretty poorly of their leadership and delegation skills.
In fact a crisis is a crisis, and if it's serious enough it will drive markets down whatever month it is. There is a more pressing issue with August, and that is that in Europe the banks just shut down. Everyone is on holiday, for two or three weeks at a time. The monthly ALCO meeting (the bank asset-liability committee, the key risk management forum in every bank) is often postponed and nothing happens. Decision-making is held off until September.
Such a long summer lay-off cannot be positive for economic output and productivity, especially when one remembers that in the Asia-Pacific region it is an alien concept that everyone goes off on their holidays in August. But the August slowdown is a bad form of management and not a good way to set up an infrastructure and culture that encourages control and responsibility.
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Postponing key decisions for a month because everyone is on holiday does not set the right tone in any firm and in any industry. There has to be a better way. One doesn't want to go down the path of more bureaucracy and more rules, after all the decision when to go on one's holidays should be a free one for every employee. Perhaps the solution is for greater delegation? As my first boss in the City, the legendary Sean Baguley of Hoare Govett Securities, always used to say, "Why have a dog and bark yourself?"
Given that we know Europe pretty much shuts down for August, it makes sense for firms to put in place whatever appropriate mechanism is necessary to ensure risk management processes continue as business-as-usual. It'll make the next August crisis that much easier to handle…
Professor Moorad Choudhry is at the Department of Mathematical Sciences, Brunel University and author of The Principles of Banking (John Wiley & Sons 2012).