Communication Lessons from Banking Regulators
Lawyers routinely communicate with clients regarding the assessment of legal risks, while banking regulators communicate with investors regarding the valuation of assets. While the communication topics may differ, lawyers can gain valuable insights from regulators regarding high-quality communication.
For instance, you can learn about central bank communication from the book "A Crisis of Beliefs: Investor Psychology and Financial Fragility," by Nicola Gennaioli and Andrei Shleifer.
These authors analyzed all reviews on the financial stability of the Federal Reserve, the Bank of England, and other major banking regulators, providing a vast amount of empirical data on the vulnerabilities central banks perceive in the financial system and the readiness of financial institutions to withstand potential shocks.
I believe that lawyers may find the following aspects of this study particularly relevant:
Banking regulators are cautious in their outlook, as are legal professionals. Negative events and risks related to lower asset prices are more commonplace than positive price predictions. While there are neutral ratings, they are generally less common than negative ones.
It is essential to be flexible and communicate with consideration for the circumstances. When banking regulators have confidence in the rationality of investors, they fully disclose information. Alternatively, they may indicate only negative aspects to protect the market from irrational reactions. Lawyers should also adjust the volume and content of their communication based on the client's level of decision-making.
Excessive pessimism can be detrimental. If one only sends negative signals, they may eventually lose their effectiveness and be taken less seriously over time.
Strategic silence can also be harmful. Failure to provide information can be interpreted as a lack of attention, limited information-processing capabilities, or even ineptitude. In addition, others may fill the information gap with their own (possibly incorrect) assumptions.
It is possible to be positive, but it is not always appropriate and should be avoided in certain situations. It is advisable to avoid situations where even modest positive forecasts lead to excessive optimism and an overestimation of expectations.
Finally, it is important to strike a balance in communications. Bank regulators often take a cautious approach to communications, leaning towards a negative perspective. There is no one-size-fits-all solution for legal matters, but a prudent approach to the analysis and evaluation of legal risks may be a good place to start.#legal #legalnotes