The following is the third in a series of articles on bank risk culture. The previous articles can be accessed on the blog here.
In the previous articles we argued that it is futile if not impossible to separate the risk culture of an institution from the other aspects of culture within it. This article further develops this assertion by looking at some very specific examples of how banks got into trouble during the subprime crisis and why, in each case, only focusing on risk culture would have been totally inadequate.
In a January 2009, The Economist wrote an article on Citigroup entitled “A House Built on Sandy”, a less than veiled reference to the bank’s former CEO Sandy Weill and its troubles during the financial crisis. The article did not pull any punches and here are just a few of the statements it made: Continue reading
Posted in Banking, Business
Tagged bank, Citigroup, Culture, Financial Crisis, institution, Investment Banking, Merrill Lynch, Organisation, RBS, Risk, Risk Management, Subprime, TBTF, Too Big To Fail, UBS, Wall Street
The following is the second in a series of articles on bank risk culture. The previous article can be accessed here.
The subject of the risk culture in banks is all the rage these days and experts and academics of every hue and stripe have opined on the subject and given their views. A 2012 report by Ernst & Young entitled; Progress in financial services risk management: A survey of major financial institutions, states the following:
“Culture is a critical area of management focus, particularly for firms most severely impacted by the 2009 crisis. Strengthening risk roles and responsibilities, enhancing communication and training, and reinforcing accountability were the key initiatives reported to strengthen risk culture. Making risk “everyone’s business” throughout the organization is an ongoing effort.” Continue reading
Posted in Banking, Business, People
Tagged Banks, Business, Culture, economy, Financial Crisis, FSA, Governance, people, Regulator, Risk, Risk Management
Banks that are too big to fail or TBTF are by definition also too big to manage or TBTM. In Part II of the series we look at the role played by the growth of products and markets in this phenomenon. Part I can be found here.
What is it about the industry that makes banks so susceptible to becoming TBTM or too big to manage? As noted in Part I, egos and megalomania do play a significant part. However, they are definitely not the whole story.
For many bankers, performance is synonymous with size. Bankers take it as gospel that the greater their share of a particular product market, the greater the profits to be earned from that market. It is obvious that such a proposition does not necessarily hold true.
Posted in Banking, Business
Tagged Banks, Business, credit derivatives, economy, financial crises, Financial Crisis, Goldman Sachs, herd mentality, JP Morgan, markets, Merrill Lynch, Mortgages, Risk, Risk Management, Subprime, TBTF
Presented by Jonathan Ledwidge, Author
April 18 at 12 p.m. U.S. Eastern Time
The subprime financial crisis is but one of a series of banking-related financial crises that have arisen in the past 40 years. These have included the LDC debt crisis of the 1970s and 1980s, the junk bond crisis of the 1980s, the Japanese asset bubble of the late 1980s and early 1990s, and the dotcom crisis of the late 1990s to 2000.
The webinar will demonstrate how a thorough analysis of each of these crises at the micro level would have enabled banks to avoid the worst of the subprime crisis long before their mathematical risk models exploded. Yet, the micro indicators were not the only warning sign.
Thus during the webinar we will explore how banks could and should have reduced their exposure to the subprime crisis if they had also examined the macroeconomic and geopolitical indicators surrounding each of the previous crises. Finally, we will look at what both these macro and micro indicators tell us about the current risk climate.
Use this link to register for the webinar.
We can never legislate or regulate our way to sustainable banking—the industry needs to adopt a new strategic business model
Déjà vu All Over Again
“They came on in the same old way and we sent then back in the same old way”.
They were the words the Duke of Wellington used to describe the repeated and futile attempts by Napoleon’s Grand Armée to break through the British defenses at Waterloo.
They can equally be used to describe the current prescriptions for the subprime crisis.
We remain mired in the unenviable position where those who know about banking are firmly wedded to the same old solutions, while those who don’t know about banking i.e. some in the mass media and certain politicians, resort to populist rhetoric. Sadly, the debate on the subprime crisis has generated more heat than light.
It is time for something different. However, before we move forward with a new prescription we need to better define the problem.
Posted in Banking
Tagged Audit, Bank of England, banking, Clearing The Bull, Credit, Dick Fuld, Federal Reserve, Finance, Financial Crisis, Fred Goodwin, FSA, Investment Banking, Junk Bonds, LDC Debt, Legislation, Regulations, Risk, Risk Management, SEC, SOX, Subprime