The wave of US bank failures in 2008-09 is now often seen as an unavoidable by-product of the global financial crisis that began in the United States. Yet excusing these failures due to the severity of the credit crunch obscures the responsibility of many individual managers involved, according to Oxford Analytica.
While the crisis itself had many causes (from excessively low interest rates to federal regulatory policies encouraging homeownership), well-run banks can survive the most severe shifts in the credit cycle; most US banks came through 2008. Those that did not shared many characteristics with other major US banking collapses over the past 30 years. At their core, bank failures are usually attributable to serious internal management and moral failings — which offer valuable lessons to business leaders well beyond the fields of banking and finance.
- Banks with strong internal social capital among employees tend to be better equipped to ride out crises.
- It is insufficient to blame securitisation and financial innovation for the crisis; many of these products existed for decades.
- The tendency towards greater risk aversion within the financial industry is likely to persist — perhaps for a generation.
In the largest US bank failures of each of the last three decades, Continental Illinois and Bank of New England ran into trouble with specialised loans to highly cyclical businesses (oil and media companies, respectively), while Washington Mutual was knee-deep in disastrous subprime mortgage lending.
These forays into new lines of business were accompanied by deliberate executive decisions to privilege loan growth over creditworthiness. Moreover, it eventually became obvious to many executives that they were making loans that might flatter short-term paper profits, but that did not serve the long-term interests of customers or shareholders.
Ultimately, banks only prosper when their customers do — a truism that applies to most other businesses. The common denominator of most major banking crises is a breakdown of this ethos, which erodes social capital within the bank — leading to short-termist, exploitative behaviour. Most banks avoid these tendencies. For those that do not, even the best risk management is unlikely to protect the bank from severe problems over the long term.
The most important lesson of the 2008-09 US banking crisis is that building a robust institutional culture of service to all stakeholders (shareholders, customers and employees) may be the best guarantee of effective risk management. It helps protect banks from a narrow focus on rapid revenue and market share growth — which can leave them dangerously exposed when the credit cycle turns.
For details see Moral shortcomings drive most banking failures