We Are Always Rooted in The Past
One traditional way of forgetting has always been, post-crisis, to split an organisation into “New Bank” and “BadBank/OldBank”. Seen that many times (and the non-recurring-items/write-offs etc is the accounting version for all companies).
Nothing wrong in principle with that pace the fact that it also always psychologically leads to dumping the problems in a bucket called “The Past”. The New Bank folks create some clear blue water, some aura of cleanliness and saintliness and proceed all over again with Groundhog Day (as the origins of today’s “Bad Bank” were last decade’s “New Bank”). They proceed through some predictable dynamics to replicate the crisis that gave birth to them.
One of the key dynamics is to start with minimal risk which reinforces the conviction of saintliness. Over time this slowly increases and increases until we create the familiar saw-tooth pattern whereupon excess systemic risk (of course everyone else was doing the same as your bank) prompts another watershed market crisis and yet another collapse.
It is important to see that the origins of this pattern are an act of forgetting – or perhaps more precisely an act of “sanitised differentiation” – “we are not like them”.
The Ancient Greeks had a good word for that kind of act – hubris.
It’s Already Started
The 2008 banking crisis was mega, the worst since the great depression. Indeed as many of us recall in those days it was unclear whether the whole system would survive.
Not unsurprisingly such a huge crisis gave birth to such a huge split between #OldFS and #NewFS – such a split that this time round “New Bank” is now not even a Bank!
However it is still in the same game (lending and borrowing/equity issuance) that has been around for a loooong time. Whilst the digital bit is new there is (in a sense) nothing innovative about the AltFin concept. Communities have been lending and borrowing from each other since time immemorial.
Although Zopa invented online non-bank lending and borrowing before the crisis (and newly-IPOed Lending Club were around too) the crisis has given a massive fillip to explosive growth in the AltFin sector. It has been a major factor in the UK government being so supportive of it in many ways – it really has pushed the boat out in terms of support.
On the other side #OldFS/”Bad Bank” has been hamstrung with massive regulatory bureaucratic burdens, capital requirements, on top of having got “too big to manage”. [See eg the FT article “Banks have become too complex to grasp”]
Now for the avoidance of doubt I am full of nothing other than admiration for the brilliant track record of the principle AltFin/Debt players. The leading players all appear to be very conscientious and committed.
But having seen history the new boys always look like this! They always have shiny shoes and comb their hair and are polite to teacher. It’s only years later when some of them haven’t made prefect that they get caught smoking behind the bike shed.
I would have no problem putting one-year money with any leading player right now. But personally I’d put ten-year money with none of them. Time – well time changes a lot – in ten years time they could all have been taken over, sacked, left, grown too fast, had frauds etc etc etc.
There’s One Born Every Minute
If the best of the new boys are undeniably impressive and have shiny shoes now, not everyone does. I have to avoid rolling my eyes on the occasions when I have been told by a participant in the AltFin sector that “it’s not risky”.
Doh! There’s risk getting out of bed – you can break your ankle! And there’s always risk when it comes to money.
Another canard is “we understand risk these days” (see story at end of this article).
A further “I don’t believe you just said that”-ism that I have heard even more often (which tells me the person I am speaking to didn’t do GCSE-FS History) is the following.
Overenthusiastic (& too young/long-term memory loss) Fintech folk often pronounce that the problem with #OldFS is a lack of innovation. They must be crazy! The problem has been an excess! If there hadn’t been innovation at all in the past thirty years we would doubtless have a far more stable financial services ecosystem.
Will Risk Management Save Us?
In the next article in the series to help close this “history gap” I will tell the story of thirty years of risk management in the City. Huge changes. Huge expenditures. Huge expectations. Huge mistakes.
But to end this article I will share a personal story from early 2008 when I was consulting for a bank that would go bust later that year. I was vigorously debating with another consultant who had also been a Global Head of Risk in the 90’s.
His position was that banks had learned from the past, there is so much risk tech these days etc that the days of crises had passed. My position was that there would always be crises – short-term memory/saw-tooth (esp. as excess banking capacity as banks rarely left to go bust)/tech doesn’t measure but model risk/UK property cycle always unstable. Yada yada.
Anyway this debate went on for some time, neither giving ground. Until the autumn at which point I got lifetime free coffee rights from my chum. Reminds me I must give him a call – he should stick some ten-year money in AltFin – it’s basically risk-free isn’t it?