Avoiding another crash

To identify the right solutions, we have to go back to the causes of the financial crisis. By doing so, we’ll be able to identify what banks have done wrong and how they can avoid making the same mistakes. History has repeated itself already – the problems that brought about the 1929 crash are similar to the causes of the 2008 meltdown.

We cannot allow history to repeat itself once more.

Careful attention should be paid to the consequences of the removal of the Glass-Steagall Act in 1999. The 1933 Act was introduced to separate investment and commercial banking activities to prevent savings-and-loan type banks from engaging in speculative and risky trading activities with customers’ deposits. But when the act was repealed in the late 1990s (because most in the financial community felt it was too harsh) investment banks were once again able to increase their activities – and they did so in huge volumes. Demand for large returns were high, bankers were making huge profits and were getting greedier and greedier, taking bigger risks for higher returns.

The greed culture was also to blame for the onslaught of new financial products being placed on the market, many of which were being developed by people who did not have the proper controls. Not only that, many did not fully understand how these products worked. Further fuelling the greed among banks were silly bonus schemes. All these factors contributed to a culture where many bankers were ‘playing games’ with their company’s capital, neglecting the fact that they could be increasing the risks for both their company and their shareholders.

Many continue to ask, how can we protect against another financial crisis? Is the answer greater regulation? Perhaps. But in addition to that, every single board member must take proactive steps to install strong governance and robust organisational structure. They must pay more attention to selecting competent and fit employees and take greater responsibility for the decisions that they make. If they fail they should be held accountable to financial regulators, their customers and the shareholders. The sad fact is that board members and supervisors have failed to act appropriately – 2008 has shown us that. The challenge remains: how do we safeguard ourselves against another banking crisis?

Changes in the business strategy are essential. And, they have to be visible to the market to deserve the right to be accepted as a sustainable partner for economy and society.

Guenter Droese, chairman of the European Captive Insurance and Reinsurance Owners Association, former global head of corporate insurance at Deutsche Bank Group