Executive Fellow of Finance
It is five years since the collapse of Lehman Brothers. Since then there has been a plethora of regulation, whose aim is to prevent such a collapse ever happening again. Yet there is an uncomfortable feeling, that despite this activity, the financial system has not been reformed in a way which makes it safe, or makes it efficient. Even today (9 September), John Vickers, the architect of bank regulation in the UK has suggested that, over time, bank capital ratios need to be doubled!
Academics and practitioners have noted the limits of the new financial rules. Professor Ian Cooper and my colleagues at London Business School, for example, have shown that the latest international rules governing banks, known as the Basel III rules, are worse at predicting bank failure than those they replaced. Andy Haldane of the Bank of England has pointed out that the measures which are used to assess future risk have limited ability to predict, and so prevent crises. Professor Anat Admati of Stanford University notes that banks, whose first duty is to keep our money safe, have set by only £1 of reserves for every £30 they lend. Professor Henry Hu of the University of Texas has shown how ever more complicated accounting rules have set in train a process of gaming by those whose performance they are supposed to measure. Elizabeth Warren of Harvard Business School has shown how consumer information has failed to provide better product. So the list goes on.
But at root, the problem is that business, particularly financial business, cannot succeed if practitioners take little or no responsibility for their actions, and feel that they can do anything, provided it is within the rules. All that happens is that the rules get more complex, and are gamed. Ultimately, like good doctors, financial practitioners need to take a responsibility for the service which they offer the public. That what they sell is in the customers' interest and that their actions do not in any way threaten to bring down the system.
But this is only possible through dialogue. Between practitioners, regulators and academics. That is what we will be doing on 17 September 2013, here at London Business School. The prize is huge. We need the financial services industry can fulfil its purpose of safe keeping assets, of providing a payments system, of intermediation and risk reduction. These services, are the lifeblood of any successful economy, and like the body's cardiovascular system they need to be fit and healthy.
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