Structural Reforms 'Not a Solution' to Excessive Risk Taking
Reform proposals for the UK banking sector, which are due to be announced in September, are unlikely to stop some banks taking excessive risks in future, according to Simon Ashby, associate professor in financial services at Plymouth Business School.
“You can force a separation between retail and investment banking but without cultural change, it’s just a sticking plaster. We will be storing up problems for the future,” said Ashby.
The official investigation into the financial crisis commissioned by the government and chaired by Sir John Vickers of the Independent Commission on Banking (ICB) is expected to concentrate on structural reforms and capital requirements for banks when it releases its final report on 12 September.
Asby’s recent paper for the Financial Services Knowledge Transfer Network (FS KTN) entitled ‘Picking up the Pieces’ challenges the view that greater regulatory prescription and capital requirements are what is needed to improve long-term stability in the banking sector, or that simple solutions, such as caps on bonus payments, will prove effective. Instead, it recommends a series of measures to enhance risk management and governance practices in financial institutions and their regulators and mechanisms to support cultural change.
Ashby’s project for the FS KTN started from the premise that most reports into the financial crisis came from outsiders looking in, but that insiders could have a different perspective and many financial institutions had not got involved in excessive risk taking. Twenty senior risk professionals from the banking industry took part in the study and concluded that ultimately the crisis was the result of management weaknesses within both financial institutions and their regulators.
Respondents placed much less emphasis on economic and market factors, such as low interest rates or the growth in securitisation, and much more on human and social aspects of the crisis within the institutions and the regulatory machinery, than did the external experts. Instead, they saw inappropriate risk cultures, poor risk communication and an over-reliance on mechanistic (model-driven) approaches to risk assessment and control.
The group also concluded that financial firms’ risk managers should have training in business and management as well as risk assessment and modelling so their role was seen as supporting business decisions rather than as costly red tape imposed by regulators.
The core recommendations of the report are:
For financial institutions