Banking crisis: PM’s assessment of causes is wrong, say risk experts

Mar 24, 2010

 

A new survey shows that, almost unanimously, the sector disagrees with UK Prime Minister Gordon Brown’s assessment that the most important cause of the crisis was “global economic circumstances beyond anyone’s control”.
 
Instead they say that the crisis came about because of failures in organisational culture and ethics. Drastic action to improve governance within the banking sector is stiull urgently required.
 
Now a leading risk management expert, who gave evidence to the Treasury Select Committee has called for a thorough investigation into the causes of the crisis.
 
Paul Moore, senior partner at risk management experts Moore, Carter & Associates and the former head of group regulatory risk at HBOS, said: “Gordon Brown and other politicians were wrong – the crisis was not caused by global circumstances beyond anyone’s control and Sir David Walker’s review of governance is not radical enough to create the separation of power in the boardroom required to overcome the current natural conflicts of interest which exist.
 
The report concludes that there should have been a detailed investigation into the crisis: 58% of respondents agreed that there should be an investigation to establish wrong‐doing; and 68% agreed that there should be an investigation “on a truth and reconciliation basis” to inform future practice and policy development.
Mr Moore said: “We also clearly need to have a proper investigation into who did and did not do what.”
 
The causes and implications of the 2008 banking crisis survey of risk managers was designed and conducted by Moore, Carter & Associates with Andrew Kakabadse, Professor of International Management Development at Cranfield School of Management.
 
The survey examined the causes of the banking crisis and the extent to which failures of risk management and governance of risk and regulation contributed to the crisis. It also looked at the nature of those failures and the need for internal and regulatory change.
 
It was carried out in order to inform policy makers as they investigated how to strengthen governance processes following the Walker Review of governance within UK financial institutions.
 
Professor Kakabadse  said: “Our survey proves we cannot trust banking executives to govern themselves and that drastic action is still needed. The Walker Review made interesting reading but it does not outline how strengthening of governance processes will be achieved.“
 
The survey has significant implications for improving the effectiveness of risk management and governance in financial services, as well as for the restructuring of regulations. It recommends that where they do not exist already, the tools and methodologies for assessing culture and ethics should be developed urgently.
 
Mr Moore said: “This survey independently supports one of the most important points I made in my evidence to the Treasury Select Committee – that there is no doubt that you can have the best governance processes in the world but if they are carried out in a culture of greed, unethical behaviour and indisposition to challenge, they will fail.”
 
He said that mandatory ethics training for all senior managers and a system of monitoring the ethical considerations of key policy and strategy decisions within the supervised firms was essential.
 
“In my view, the only way to prevent a re-occurrence of a similar crisis is to create a genuine separation and balance of powers in the boardroom,” Mr Moore added.  “Companies and regulators now need to focus their attention much more strongly on culture, ethics and effective internal risk management rather than other processes.
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