A key element in the development of any tangible product is the risk analysis that is (or should be) included in the design stage. If I build this object/product as specified, how safe is it going to be? Will it harm my customers? Does it open me up to legal actions? Does it comply with local (and international) consumer and environmental regulations and laws?

The same principal applies to financial products. And have our financial intuitions and financial innovators taken note of this? Not ****** likely!

Nowadays I am heavily involved in training banks and their staff in managing Operational Risk. A key component of our courses in this direction lies in just this area.

The message is clear:

• To commercial banks - ensure that all new products, activities, processes and systems are subject to adequate assessment procedures regarding operational risk before they are introduced/ implemented. Remember too that using new technology introduces new risks and make sure that these are properly assessed and understood.
• To central banks- ensure that your oversight and supervisory functions include a rigorous and effective stress testing of new financial products and processes before the product or process is "licensed" or iwhen these fall under regular review.

Of course, in getting these processes adapted as policy, we face a problem that can best be split between banks and central banks as under.

• At commercial and other banks - It's a contest between profit and extra costs and the profit motive always wins out. Bank executives don't like Jonahs (i.e. a person who carries a "jinx", one who will bring bad luck to any enterprise). Profits get them bonuses. Costs reduce profits. Also the "whiz kid" innovators are like the golden goose and you don't tell them that their eggs are inedible!
• At central banks - There is an over reliance on academic excellence with, I regret to say, a disdain for practical hands-on operations experience from the coal-face. Some central bankers seem to think that their profession is a "higher calling" which must stand aloof from the sweat and grind of banking-halls and back-office operations.

And there are no sour grapes here either. Personally I am well versed in academia, specifically in banking and monetary policy. Equally so I have had over forty years of hands on operations experience - from hand posting the ledger, to building state of the art RTGS systems plus all the changes that went in between.

I have two messages here.

• To banks - do your homework before you launch a new product or process. Do an appropriate risk analysis at the design stage and get an outside professional to facilitate it with an appropriate written recommendation to as well as agreement from the local bank board. Spell out the details of the analysis - list the risks and their countermeasures.
• To central banks - in examining new products and processes use experts in these fields and give adequate consideration to their view and recommendations. In doubt use two or more experts. Consider employing folk with these skills to do the oversight or the risk evaluation.   

Remember that banking, by its nature is based on trust. If you lose the trust of the public you lose everything!