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HBOS report yields three important lessons for all businesses

British regulators have finally published their report into HBOS, the bank formed from the merger of Halifax with Bank of Scotland, more than seven years after its collapse. The 600-odd pages contain much detail on events and personalities. But there are general lessons for all businesses. Avoid the diversifier’s fallacy. Beware the winner’s curse. Fear adverse selection.

Limited liability led to limited care for other people’s money

The financial sector in the 1980s and 1990s was characterised by a rush to incorporation. The mantra of “shareholder value” restored the nexus between finance and business that Smith had feared and Brandeis denounced. And the stage was set for negligence and profusion to prevail once again.

We were better served by old-fashioned relationship-focused bank managers

The bank manager used to be a community figure who would base his (they were all men) lending decisions as much on his local knowledge and the character of the borrower as on figures. He did rather better than his modern-day, intellectually-superior equivalent.

Solutions to the Greek debt crisis should be found through pragmatism not blame

The Greek crisis is not simply the result of Athens’ inept public administration but also of an extensive carry trade on eurozone convergence by northern European banks, notably in France and Germany, which obtained short-term profits by matching northern eurozone liabilities with southern eurozone assets. For every foolish borrower there is usually a foolish lender.

We can reform the economics curriculum without creating new disciplines

Following the global financial crisis there has been much discussion of curriculum reform in university economics teaching. More pluralism is required, but there is no need for “two communities within the same discipline”.

Why our planes are growing safer and our finances are not

One reason modern air travel is reassuringly safe is that investigation into accidents is honest and thorough. The contrast with finance could hardly be greater.

It’s too risky to rely on financial risk models

Extremes among observed outcomes are much more often the product of “off-model” events than the result of vanishingly small probabilities. The implication is that most risk models are unsuitable for the principal purpose for which they are devised: protecting financial institutions against severe embarrassment or catastrophic failure.

Rise in US and UK inequality principally due to financialisation and executive pay

The people who ran big companies were always relatively well paid, but the meaning of “relatively well paid” is now altogether different. Finance employs more people, recruits more able people and pays them a lot more. These effects have not been seen in countries, such as France and Germany, that have proved more resistant to financialisation.

Why simple and robust regulation is the way to reduce financial complexity

Much of the complexity of modern finance is the result of regulatory arbitrage – avoiding or minimising restrictions by engaging in a transaction with more or less identical effect but more favourable regulatory treatment. Many regulators still cling to the hope that it could be eliminated if only rules were sufficiently extensive and sufficiently carefully prescribed. But this is an illusion.