Outlook: Bankers may be wising up at last

Bankers may be wising up at last

The wooden spoon award for clownish behaviour last year must again go to the banking industry, and particularly to European bankers, who were recklessly increasing their exposure to South Korea and the other Pacific Rim economies even as Japan was reducing hers. How is it that with sickening regularity, our bankers every few years seem to find a whole new system of black holes to pour their shareholders' and depositors' money into? Don't they ever learn? In the 1970s, it was property, in the early 1980s it was Latin American sovereign debt, in the early 1990s it was dodgy entrepreneurs and, yes, property again. Now its lending to the Far East.

One answer to this question is that bankers have to lend the money somewhere and every now and again some of it is more or less bound to go wrong. Nobody else foresaw the crisis in the Far East, so why should bankers? A very similar argument was used by NatWest in the early 1990s to justify extensive bad loans to Robert Maxwell. Bankers are not policemen, NatWest insisted, and there was no reason to believe Maxwell was a crook or had overstretched himself.

However, what both cases do in their different ways is highlight another aspect of bank lending - its ability to accentuate boom and bust. Bankers tend to feed the speculative bubble on the way up by pouring capital into it and then greatly enhance the subsequent crisis in the often disorderly struggle to get their money back which then ensues. Governments have traditionally been the main engines of the boom and bust cycle, but bankers tend to be the drive shaft. Nor do they ever seem to learn from the experience.

One possible explanation for this is that large banks are very rarely allowed to go bust. This is certainly the case in the developed world where there is an implicit understanding that big banks are essentially government-backed institutions; somehow or other depositors will always be bailed out if the bank gets into trouble.

In the South Korean crisis, we are beginning to see a variation of this implicit guarantee. So desperate is the South Korean government to preserve its reputation in international credit markets, such as it now is, that it is willing to contemplate the conversion of some commercial debt into sovereign debt. If bankers are never likely to suffer the full consequences of their lending decisions, then they can hardly be blamed for failure to act with due care and attention.

There is no obvious solution to this problem. If governments ceased to bail out banks, then it is possible to imagine a crisis like that of the Far East causing very considerable systemic damage with far-reaching consequences for the international economy. Nobody wants that.

Most suggested remedies suffer from clear drawbacks. Banks could, for instance, be asked to cross guarantee-each other, thus causing peer group pressure against poor lending. However, this would also restrict competition between banks and would be next to impossible to administer. Furthermore, such a scheme would not be dissimilar in its effect to the lifeboat operations central bankers try and arrange among collections of domestic banks when one gets into difficulties. There is no evidence that the enforced participation of banks in lifeboats prevents bad lending.

The best hope must be that, as bankers and capital markets become more sophisticated, transparent and wise, the problem will slowly prove self- correcting. To argue that in the Far Eastern crisis we may have seen the last of the great boom-to-bust seizures would be going too far. It is human nature to speculate. No amount of experience and regulation will stop it. All the same, policy-makers and markets the world over do genuinely seem to be getting better at reducing the severity of the peaks and troughs in the business cycle. It is not beyond the bounds of possibility that bankers too might be wising up, if only a little.

PROMOTED VIDEO
News
Gardai wait for the naked man, who had gone for a skinny dip in Belfast Lough
newsTwo skinny dippers threatened with inclusion on sex offenders’ register as naturists criminalised
Sport
Van Gaal said that his challenge in taking over Bobby Robson's Barcelona team in 1993 has been easier than the task of resurrecting the current United side
football
Arts and Entertainment
The Great British Bake Off 2014 contestants
tv
Life and Style
tech
Arts and Entertainment
filmThe Battle of the Five Armies trailer released
News
news
Arts and Entertainment
Beast would strip to his underpants and take to the stage with a slogan scrawled on his bare chest whilst fans shouted “you fat bastard” at him
musicIndie music promoter was was a feature at Carter gigs
Arts and Entertainment
Story line: Susanoo slays the Yamata no Orochi serpent in the Japanese version of a myth dating back 40,000 years
arts + entsApplying the theory of evolution to the world's many mythologies
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Extras
indybest
News
Performers dressed as Tunnocks chocolate teacakes, a renowned Scottish confectionary, perform during the opening ceremony of the 2014 Commonwealth Games at Celtic Park in Glasgow on July 23, 2014.
news
Life and Style
Popular plonk: Lambrusco is selling strong
Food + drinkNaff Seventies corner-shop staple is this year's Aperol Spritz
Life and Style
Shake down: Michelle and Barack Obama bump knuckles before an election night rally in Minnesota in 2008, the 'Washington Post' called it 'the fist bump heard round the world'
newsThe pound, a.k.a. the dap, greatly improves hygiene
Arts and Entertainment
La Roux
music
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior Fund Administrator - Edinburgh - £22 p/hr

£20 - £22 per hour + competitive: Orgtel: Senior Fund Administrator, Top Four ...

Entry Level Fund Accountant (Edinburgh)

£17 - £20 per hour: Cameron Kennedy Recruitment: My client, one of the worlds ...

SQL DBA/Developer

£600 per day: Harrington Starr: SQL DBA/Developer
 SQL, C#, VBA, SQL Server, ...

Risk Analyst - VBA/EXCEL

£300 - £600 per day: Harrington Starr: Risk Analyst Access, EXCEL, VBA, RISK, ...

Day In a Page

The children were playing in the street with toy guns. The air strikes were tragically real

The air strikes were tragically real

The children were playing in the street with toy guns
Boozy, ignorant, intolerant, but very polite – The British, as others see us

Britain as others see us

Boozy, ignorant, intolerant, but very polite
Countries that don’t survey their tigers risk losing them altogether

Countries that don’t survey their tigers risk losing them

Jonathon Porritt sounds the alarm
How did our legends really begin?

How did our legends really begin?

Applying the theory of evolution to the world's many mythologies
Watch out: Lambrusco is back on the menu

Lambrusco is back on the menu

Naff Seventies corner-shop staple is this year's Aperol Spritz
A new Russian revolution: Cracks start to appear in Putin’s Kremlin power bloc

A new Russian revolution

Cracks start to appear in Putin’s Kremlin power bloc
Eugene de Kock: Apartheid’s sadistic killer that his country cannot forgive

Apartheid’s sadistic killer that his country cannot forgive

The debate rages in South Africa over whether Eugene de Kock should ever be released from jail
Standing my ground: If sitting is bad for your health, what happens when you stay on your feet for a whole month?

Standing my ground

If sitting is bad for your health, what happens when you stay on your feet for a whole month?
Commonwealth Games 2014: Dai Greene prays for chance to rebuild after injury agony

Greene prays for chance to rebuild after injury agony

Welsh hurdler was World, European and Commonwealth champion, but then the injuries crept in
Israel-Gaza conflict: Secret report helps Israelis to hide facts

Patrick Cockburn: Secret report helps Israel to hide facts

The slickness of Israel's spokesmen is rooted in directions set down by pollster Frank Luntz
The man who dared to go on holiday

The man who dared to go on holiday

New York's mayor has taken a vacation - in a nation that has still to enforce paid leave, it caused quite a stir, reports Rupert Cornwell
Best comedians: How the professionals go about their funny business, from Sarah Millican to Marcus Brigstocke

Best comedians: How the professionals go about their funny business

For all those wanting to know how stand-ups keep standing, here are some of the best moments
The Guest List 2014: Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks

The Guest List 2014

Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks
Jokes on Hollywood: 'With comedy film audiences shrinking, it’s time to move on'

Jokes on Hollywood

With comedy film audiences shrinking, it’s time to move on