It is a common place at the moment that the recent spate of bank crashes was a sudden whirlwind that blew through the banking sector. Sure there had been sub-prime problems brewing for a while but the crisis came from a collapse in confidence that occurred over a short period.
At top right is a chart of the share price of HBOS over the last twelve months. HBOS is at present lined up for takeover by LloydsTSB following a collapse in the HBOS share price a few weeks ago. However a look at the chart reveals that the decline in share value of HBOS was a well established trend throughout the year. barely discernible among the yearly trend is a step drop in the share price around mid September onwards. This drop compared to the overall decline in share value for the year was simply like the final slash in a death of a thousand cuts.
What is clear is that there were indicators of the present crisis building over the whole course of the year.
Which begs the obvious question - what where the senior bankers, the regulators, the governments, and the risk agencies doing as this crisis began to bubble and brew? Precious little is the answer. Each in their own way was locked into the situation.
For the banks it was profit and the need not to be left behind as each bank out did the other in seeking to climb on board the new financial instruments which promised so much.
The regulators ( and politicians ) were locked into thinking that the issue with regulation is over-regulation. It is not. the issue is what is the correct regulation for any given market. It is about regulators anticipating risks in the system and requiring the regulated institutions to operate in a way which keeps those risks to manageable levels. In all this the regulators, and their masters the politicians singularly failed. ALL of them. No party was calling for more thorough regulation. De-regulation was , to one degree or another, the mantra of all the parties.
Governments were locked into the situation because booms , while they last, are popular. People feel wealthier and no politician wants to be the first party pooper. This is of course an indictment of our political system and of all of us as citizens. There are times when politicians must lead and not follow public opinion. Politicians have a duty not to feed unsustainable booms simply to maintain popularity.
The risk rating agencies have been little mentioned in this crisis. But they were still giving strong ratings to banks until very recently and to banks which have now collapsed. Questions need to be asked about the standards that these risk rating agencies operate to and how they are held to account.