The collapse of Lehmann Brothers in 2008 marked the start of the global financial crisis (GFC). A post mortem on some of the reasons causing or contributing to that GFC threw up the following:
- Modern legislators in the USA had relaxed laws and regulations put in place at the time of the Great Depression which had been designed to try to avoid a repetition of that dramatic event,
- As a result, Trading banks had been able to merge with Retail banks giving them access to a larger pool of investor funds,
- Housing mortgages were granted to people with little, if any, capacity to repay,
- That wasn’t seen as such a problem if the expectation was that houses couldn’t go down in value, only up,
- Those mortgages were then packaged up and sold as a new and attractive form of financial product, with the stamp of approval of major Ratings Agencies
Were any lessons actually learnt from the GFC, however? A cynic would say that the main lesson learnt by the large banks and financial institutions was that, while before the GFC they “hoped” that government couldn’t allow them to fail, after the GFC they actually knew it!
In essence, the GFC only emboldened them.
For us in Australia it was easy enough and convenient enough to conclude that we were different and things like that could only happen in other places such as the USA. Fast forward ten years, however, and a Royal Commission in Australia – one only reluctantly agreed to by the current government – has itself thrown up some startling events in modern Australian banking.
Those events include:
- Housing mortgages granted to people with little, if any, capacity to pay, enabling them to acquire houses in a falling market (where have we heard that before?),
- “financial advice” given which was for the benefit of the financial institution providing it but not for the benefit of the clients receiving it and charged for it,
- Charges for services not rendered at all, with such practice continuing for an extended period despite inquiry from the Regulator and assurances given to it,
- An “independent report” to the Regulator going through multiple drafts before it was considered appropriate by the entity the subject of the report.
What is the real cause of the problems now being exposed in our banking and financial system? Is it structural (with lack of appropriate safeguards) or cultural? While structural improvements should not be discounted, it is essentially a cultural issue. The desire for a culture within financial institutions based on what is good, fair, moral and ethical seems to have been supplanted by a chase for the dollar. The horse is out of the stable and getting it back is not easy. We must hope that it hasn’t completely bolted! Regulation is not the key to solution – fixing the culture is the major issue and steps must be taken by those institutions to do so.