When I deliver a training session or course on risk management, I always include the following slide:

Wildfires, Capital Markets And Risk Management Figure 1

These are some of the major risk events in capital markets over the past several decades. The most important aspect of the slide is the question mark implying what is next! Of course, we do not know but the question mark never disappoints over time. From these events, we have learned valuable lessons. And from these lessons, new regulations and internal risk management policies have emerged. We do not have to look much further than the Dodd-Frank Act, for example.

Since 1980 there have been over 100,000 wildfires in California (https://www.fire.ca.gov/our-impact/statistics?form=MG0AV3). We know that the trend is for more and more wildfires. Heck, there is even a TV show called Fire Country. Given the mind-boggling scenes from Los Angeles, reminding me of pictures of Hiroshima after the bomb was dropped, one must ask what lessons have been learned and what steps have been instituted to mitigate and manage these fires? 

Didn’t Los Angles or state officials see what happened in Maui last year? Drought conditions and wind played a major role in the scope and scale of the fires, which are some of the common denominators in these disasters in two different states.

Banks are required to create a Liquidity Contingency Plan, also known as a Contingency Funding Plan or CFP. Believe it or not, the failed Silicon Valley Bank had a CFP. But, according to the Federal Reserve’s post mortem ( https://www.federalreserve.gov/publications/files/svb-review-20230428.pdf ) “…SVB did not test its capacity to borrow at the discount window in 2022 and did not have appropriate collateral and operational arrangements in place to obtain liquidity…” This was a complete failure on SVB management’s part, among others.

Is it required for municipalities/states to have a Contingency Fire Plan or CFP? How was the impact of the drought and wind modeled and then stressed? It is inconceivable this was not done. Regrettably, the firefighters ran out of water the way SVB ran out of liquidity. But in the former case people have died. 

Obviously, there will be a full post-mortem on the disaster. The question is what will need to change? If money is a problem, maybe a private fund to mitigate such disasters is necessary. What other potential changes will be forthcoming? In the meantime, our thoughts and prayers are with all those who have been impacted by this disaster and those that continue to put their lives at risk to fight it. 

Author

  • Ken Kapner

    Ken Kapner, CEO and President, started Global Financial Markets Institute, Inc. (GFMI) a NASBA certified financial learning and consulting boutique, in 1998. For over two decades, Ken has designed, developed and delivered custom instructor led training courses for a variety of clients including most Federal Government Regulators, Asset Managers, Banks, and Insurance Companies as well as a variety of support functions for these clients. Ken is well-versed in most aspects of the Capital Markets. His specific areas of expertise include derivative products, risk management, foreign exchange, fixed income, structured finance, and portfolio management.

    View all posts