Wednesday, November 12, 2008

Understanding risk: why we are storing up even more trouble in the banking system

The last few years have seen a extraordinary consolidation in the global banking sector.

The rise of the global mega-banks has devolved global decisions onto a very small number of credit committees and a steadily smaller number of different lending policies. Many have argued that this has simply reflected the increasingly globalised economy, where corporations require a limited number of the banking relationships but still want to have access to large pools of credit and capital.

The ecology of the global banking system has become increasingly a monoculture.

The problem remains that the general view of what risk is is becoming broadly similar around the world, yet as we have seen in the repeated need for recapitalisation of different banks, this general view is wrong.

Now, we are seeing emergency rescue plans for the banks that involve yet further injections of equity capital, but this time, at the expense of the state and not the market. Meanwhile the proviso is that in exchange for this cash injections, the state demands yet further consolidation in the number of banks.

It is hard not to view this as a potentially lethal mistake. The entire risk model of most of the global banking system has been proven wrong, and instead of encouraging a de-concentration of risk and a more diverse set of risk control policies, the the nationalisation of much of the western banking system seems set to deliver massive mega banks which rely on a risk model that has already failed.

Thus, even if the current policy delivers a short term relief, in the longer term it is increasing the likelihood that there will be a failure of risk control, and will make that impact of the risk failure even larger.

It is now critical to diversify the ecology of the credit system. Increased competition is critical and once the system has been stabilised, governments should seek to break up the huge concentrated pools of capital and allow a much greater diversity in the market for risk taking.

Instead of a single provider of credit, a more syndicated approach can still allow the global corporations to obtain the capital that they need, but without forcing the kinds of concentration of risks that was the driver for the global bank consolidation in the first place.

We have seen repeated bank crises over the past twenty years, and the consolidation has increased the scale of rescues that have been required- we are now putting the entire financial solvency of our political systems at risk. The merger of Lloyds-TSB and HBOS should be reversed as quickly as possible and the larger financial behemoths need to be broken up and far greater competition allowed. Unless this happens the scale of the next crisis could be beyond any financial rescue programme from any government.


Newmania said...

I agree with all of this . Good post

kiki said...
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