BusinessCorporate FinanceKnee-jerk reactions will do us no favours

Knee-jerk reactions will do us no favours

The banking crisis has been less a financial storm, that cliché of business writing, than a financial hurricane

Alex Hawkes, accountancy age

Sweeping all before it, it has laid waste to Anglo-Saxon banking as surely as
Katrina destroyed New Orleans.

The collapse has prompted dramatic claims about the need for change, but we
would all be wise to follow Sir Mike Rake’s counsel against knee-jerk reactions.

Some say short-selling is at fault for the crisis, others that it is all the
fault of greed. Still others have criticised fair value accounting. More amazing
are those who claim that there is a culture of greed that needs to be expunged,
or that capitalism is on its last legs.

There’s no denying that such discussion makes the crisis more exciting, an
epoch-changing event, but the reality will probably prove more mundane. The
exact chain of events that has caused the current crisis must be investigated
fully. The key question is how US banks and others around the world came to take
on risky sub-prime mortgage assets without realising how risky they were.

Without jumping the gun on that question, appealing to bankers to be less
greedy seems rather forlorn. Desire for money makes banks tick; but it needs to
be allied to caution and sensible risk-management.

That isn’t a problem of Anglo-Saxon banking, it’s a problem of all banking.
Likewise, the fear stalking banks across the world. If crises could be
prevented, this one wouldn’t have happened. They are no more a reason to throw
out capitalism than recessions are.

The US and the UK should remember that the regulatory response to Enron was
arguably worse than the problem; regulators this time round should do what the
bankers should have done: be a bit more cautious.

comment@accountancyage.com

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