Don’t bank on inquiry to deliver anything we don’t already know
The way to stop banks from misbehaving is clear but still no action is being taken
What the Irish banks did wrong was very simple: they lent too much money to people who didn’t pay it back
Most of us think a banking inquiry is not just necessary but vital. What do we hope to achieve? Will we learn anything?
There are calls for a focus on who did what and when, with an emphasis on the events of the night of the bank guarantee. The “what” part of all of this is, broadly, already known. But, in key instances, we don’t know whodunnit. It might be cathartic to point fingers but I doubt if this will have many benefits. Detective stories make for riveting reading but the truth underlying the banking crash is too prosaic, far too dull, to make for a best-selling story.
What the Irish banks did wrong was very simple: they lent too much money to people who didn’t pay it back.
There were few fancy derivatives, esoteric products or, indeed, anything illegal about this – apart from an obvious departure from prevailing banking norms. Banks are supposed to have risk controls, such as not having too much exposure to a few borrowers or particular sectors. It would, I suppose, be interesting to know if internal controls – which were extensive – were broken. It seems obvious, from the outside, that they were. But I am willing to bet these breaches were not egregious, in the sense that somebody saw the rules and said “right, here we go, let’s bust them”. Rather, somebody called a meeting.
Anybody who wants to really understand what went on will have to be more than a banking expert. They will need a deep understanding of organisational psychology. Imagine, for a second, a meeting has been called by the credit department (the referees) and the sales force (the players). Unusually, the dispute is so bitter that the chief executive has been called in to adjudicate.
Corporate meetings of this kind are like the worst kind of dysfunctional family Sunday dinner. There is too much history, scores to be settled and a use of language that no outsider could hope to understand. Nobody is going to storm off but there is always a subliminal threat of violence: in the corporate case this is always the metaphorical stab in the back.
The referees point out that no rules have been broken, but it is getting close. Any more lending is going to bust pre-set limits; exposures to single borrowers and to the property sector are up against agreed boundaries. The chief executive knows that this looks bad and sides with the referees. The players immediately point out that this will cause trouble. Their own sales targets will not be met; money will be left on the table for the other banks to pick up. They say: “We will be the only ones doing this.”
There may even be a discussion of what a few oddball economists are saying about an inevitable property crash. Everyone at the table agrees that this is nonsense and, even if true, their bank is protected because they have lent only to the big developers.
The chief executive reflects on a number of things. He knows that shareholders are aware of the issues and, for the most part, are willing to trust that the bank knows what it is doing. One or two hedge funds, however, are saying the banks have lost the run of themselves and, whatever about internal limits, will soon be hitting regulatory capital buffers.
But he sides with the players: if he stops the game, he will be the first, and probably the only, chief executive to do so. Better to run with the herd than let it run over you. Rather than see limits broken, they are merely changed.
It is the psychology of all of this that is important. Why do people end up believing, sincerely, six impossible things before breakfast? Corporate history is littered with variants on this theme. The behaviour of the stock market itself over the past two centuries reveals that we are capable of believing anything.
Some or all of this might be revealed by an inquiry. I doubt it. If my wholly imaginary meeting did take place in any shape or form, there won’t be any recollections of it.
We already know how to stop banks from misbehaving but we are showing no signs of implementing those lessons. Unusually, economists from both the left and the right are united on how to prevent all of this from happening again: massive increases in capital requirements and/or an end to fractional reserve banking. These are the only lessons of relevance.