Surface Ripples

What Happens When A Bank Fails?

This is the final article in my series on the current global financial crisis. The root cause of much of the panic stemmed from a number of financial institutions which were let down by poor decision-making by senior management who were subject to a number of external pressures and expectations in the modern financial markets. Added to this was that markets had become much more inter-connected and more “stakeholders” are now impacted than anyone previously realised.

I’m not trying to exonerate the management teams, but I am pointing out that we all contributed to the current global crisis and that we all need to learn from it. We need to be prepared for when banks fail again (as they will). We need to learn from the mistakes of the past.

We've heard enough theory on “living wills”; breaking up banks deemed “too big to fail” (no real definition of this yet); increased regulation; separating investment from retail banking activities. My personal favourite is taxing the banks (including those who managed to survive and spare their customers and governments the effort of bailing them out). Here the politicians are now going to tax the very institutions that are expected to add grease to the wheels of the global economy to help it recover. Sensible? You decide…

Another way to look at what to do is to consider the “stakeholders” in banks: customers, creditors, debtors, staff, shareholders, pension funds, insurance companies, asset managers, the local community, auditors, ratings agencies, regulators, governments, the local and international economy, international trade, recruitment agencies. The impact of a failure of a large bank can be massive now.

To start with, regulators need to have more “teeth” and that means having qualified inspectors who have been in the market and understand it, the risks taken and their structure.

Secondly, we need to stop expecting exponential revenue growth every year – this was what caused a lot of the pressure to perform “whatever the cost” and turned cautious men into cowboys.

Third, we need to lower our expectations of what the banks are for. They aren’t charities and should not be viewed as “loan on demand” providers.

The above would go a long way to removing the systemic problems that caused the crisis in the first place. Banks will fail in the future for reasons yet unknown. The first thing to do is define what "failure" is. Next, identify which stakeholders are impacted. Next, minimise fallout with prompt action: get regulator, auditor and government on side (and inside); ring-fence the business that has caused the problem; call creditors into an emergency session; develop a media response to prevent panic amongst markets and customers. This may seem like overkill, but if done quickly enough, will save taxpayers a bundle!

Labels: Crisis Management, Financial, Regulation

posted by William Martin @ 17:11