The Canons of Allocations. Pragmatic. Don’t let the best be the enemy of the good.

I have commented in previous posts on the important role that allocations play in driving good behaviour . They are though not the global panacea for all banking ills; no degree of sophistication would have influenced the current trifecta of bad behaviour in the financial markets around LIBOR fixing (sic), IT snafus at RBS or PPI mis-selling.  As important as it is to do allocations properly, it is quite possible that they follow a regular pattern. That may dictate the level and frequency of analysis that is really needed around some costs.

Time for the 80:20 rule. If 80% of the time, the costs in one area are caused 90% by one area and 10% by the other, then a simple standing order for a 90:10 split is fine, as long as there is some periodic review. This should not though be an excuse to be totally summary and abstract. Many years ago, I worked for an American manager who was straight out of central casting for a typical American that does not travel well; a man as unsuited to his role as a global head of equity operations as Sarah Palin would be as Secretary of State. So parochial was this gent, that when anointed to his global role, he charged the firm for the expense of getting a passport; his rationale was that he had not had one to date and would not have one if the firm had not given him the role. One day he waxed lyrical on the matter of allocations; “Well, we do ‘em every year and is pretty much always 51% Fixed Income, 49% Equities. We should save all the fighting and analysis and simply leave it at 50:50”. Pragmatic yes, appropriate no.

Lessons Learned: Pragmatism is fine. Total abstraction is not.

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