Lessons from the past can clarify banking crisis

November 14, 2008 |

Stricter regulation of the financial services sector is likely to result from the latest upheaval in national and global markets. It is being demanded by politicians of all parties while the Financial Services Authority, which polices the sector in the UK, has announced that it is recruiting additional staff as part of a more stringent regulatory approach.

“The history of regulation is largely one of regulators trying to catch up after a crisis has arisen,” says Professor Catherine Schenk, from the World Economy and Finance Research Programme at the University of Glasgow. She emphasises that while, regulatory changes are a familiar response to financial upheavals that does not guarantee their future effectiveness. “The experience of global crises shows that new guidelines tend to be aimed at the problems that caused the last crisis rather than anticipating the next source of weakness.”

During the current crisis, many commentators have called for more robust cross-border regulation of a banking system which has become ever more global in recent decades. But Professor Schenk, whose research has included examining attempts at regulating international financial markets in the decades since the Second World War, points to long-standing and continuing obstacles which face drives for greater multilateral regulation of international financial markets. These include:

* The difficulties of tracking international financial flows and complex transactions;
* fears of pushing markets to off-shore centres which would be more poorly regulated than the existing major national ones;
* lack of agreement between nations on the costs and benefits of greater global regulation;
* perceived threats to national sovereignty.

“In the past, attempts at collaborative supervision have most commonly come after a crisis when an international event has threatened national financial systems,” says Professor Schenk. “When a crisis recedes, however, so does the impetus for regulatory reform. Meanwhile financial institutions innovate in ways to evade the new rules aimed at controlling their activities and this can cause new dangers.”

“One obvious question is, will the sheer dramatic scale of this crisis strengthen the prospects for greater multilateral regulation succeeding this time?” Professor Schenk explains, “A lot will depend on the effects on the stock market and the wider economy. The extent to which far more people are now exposed to the stock market through pensions, ISA savings and in other ways is one of the main differences between what is happening today and the 1929 crash or the 1982 Latin American debt crisis.

“The financial sector is undoubtedly a very difficult and complex one to regulate. The current initiative, known as Basle II took 9 years to develop and has now been over-run by current events. I think much will now come down to how the regulators police the new regulations which will be developed, and to what extent different national regulatory regimes can succeed in creating and implementing common approaches and features.”

2 Responses to Lessons from the past can clarify banking crisis

  1. Anonymous December 1, 2008 at 12:33 am #

    In a past life worked for various bank owned finance companies.
    I started in 1970 left in the 1992. During my time and since I have seen one or two economic downturns, recessions or credit crunches each decade, not to mention the Asian financial crisis and the infamous ‘dot-com’ bubble burst. Now the 2008 dilemma.

    When I was a lender we had to strictly follow the “5 C’s of Credit”. That is to lend money (approve a deal) you had to make judgments based on a borrowers Character, Capacity, Capital, Character and Conditions. (No time for further explanation however you can look it up on the web). The final analysis was “risk factors and ‘mitigants’ (to coin a phrase)”

    Some years later I attended a talk on the 5 C’s given by a banker during another financial crises and I asked him “If banks lend on the 5 C’s how come the rules are not passed onto younger bankers and and the same mistakes occur with each new generation of lenders?” He scowled and said he didn’t have time for questions however he would see me after his speech had concluded. Face to face in private he said to me… Richard you #@I(^Ing a&%#ol* you know it all really works on “need and greed”… AND SO IT DOES

    That’s why I find some of the following comments from around the blogosphere amazing…

    “professionals that should be looking out for our best interests”

    “the banks were irresponsible”

    “The Fannie Mae, Freddie Mac and a Banking System” created “to serve the public, it turns out it serve themselves”


    “it is time we harness our strength as ONE NATION [yep they mean the USA]”

    “The Barbarians are at our Gate”

    … AND THIS…


    Well actually the self-serving, unprofessional, irresponsible barbarians are actually, it seems, manning your banks.

    Oh yes and I don’t think ‘GOD’ is watching!

    A little ditty I wrote during a previous financial crisis…

    Bankers are w–k-rs,
    You’ll oft hear me say,
    It was true when I worked for them,
    And even more so today.

    In the sunshine of boom,
    They come for the hay,
    But in the storm of recession,
    They retreat from the fray.

    Central Banks and the ‘fed’’
    All have their way,
    Fixing how much we have,
    And the rates we must pay.

    The old teach the young,
    The smart lender’s way,
    And are better loans made,
    Same mistakes suggest nay.

    Provisions for loss,
    They report are OK,
    We’ll overvalue these assets,
    And bad debts go away.

    [oops not this time so…]

    Each night on your bed,
    For a rest as you lay
    Stuffed in your mattress,
    Your money should stay.

    This short poem is true,
    You’ll take heed I do pray,
    And for those in big trouble,
    It will recover someday.

    Richard Townsend

  2. Anonymous November 14, 2008 at 1:51 pm #

    I fear the regulatory reaction to the current crisis. Many are calling for more regulation, but just because we have a crisis doesn’t mean we need more regulation, or different regulation, or less regulation. In fact, the fact that there’s a crisis says little about the solution.

    Perhaps we have the perfect amount of regulation right now, and the turmoil in the market is just to be expected.

    I’m sure there will be plenty of reactionary regulations that do more harm than good. Sarbanes-Oxley, anyone?

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