Christian Dinesen - Absent Management in Banking: How Banks Fail and Cause Financial Crisis

The idea for this book came on the back of the losses incurred by large investment banks in 2008. One investment bank announced a quarterly loss of $14 billion as part of its full-year 2007 results. This was only one quarter of the $52 billion United States investment bank Merrill Lynch was to lose on United States mortgages. It seemed impossible to manage so badly as to incur a loss of this magnitude. Surely nobody would do this. If nobody would manage that badly, this pointed to another possibility. Some banks were simply not managed at all.

This book is about management in banking and particularly about absent management in banking. Bank customers , shareholders and regulators have assumed that banks are always managed. Banks have been assumed to be no different than other large commercial organisations, such as manufactures and retailers, in having a management that sets strategy, implements this and holds itself accountable to its owners and other stakeholders. Like other commercial organisations, some banks are assumed to be managed well, others badly, with the quality of management being subject to change over time.

But banks are different. They developed with a different approach to management historically , with banking being the top priority and much more important than management . For centuries banking was almost everything that was required. Only a few early banks grew complex enough to require management. Two of these are the subjects of the early chapters. Some banks developed by size and complexity and prospered, at least for a time. When some banks grew very large and complex, they lacked the historical development of management of other commercial organisations, such as railways and car manufacturers . Some banks learned and borrowed management from other commercial organisations.

Banks are also different in that they found it difficult to develop and change incentives to reward management as much as banking was rewarded. After five centuries of banking, many bankers had a way of doing things. They found it difficult, sometimes impossible, to change even when the banks themselves changed enormously, in both size and complexity. And these changes in size and complexity transformed the need for management. At times, this transformation was ahead of the development of management and resulted in absent management.

When banks are not managed, this makes them much more likely to fail . Bank failure has serious consequences. If some banks are not managed, this has implications for customers who have their money deposited with the banks or who depend on future bank borrowing for their lives and businesses. A failing bank can also have serious consequences for other banks with whom it may do business including borrowing money. A bank failing can cause suspicion that other banks may also be in trouble and subject to failure. This is because banks base their business on trust . For customers to deposit money with a bank they must trust the bank to be able to pay these deposits back. If one bank fails, the trusts in the banking system may be undermined. A bank failing can have serious consequences for a government. If the bank is so large that its failure threatens the stability of a countrys financial system, the government may need to rescue the bank. Such a rescue can be extremely costly to the extent that it affects the governments finances. One or several bank failures can require a government to raise additional funds, through increased borrowing and taxation or reduced expenditure or all three.