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Grieving … and the US Banking Reforms

I was trying to think of the future of banking and a model for making this work.

This in the context of yesterday's
US regulatory reforms announcements (see next blog: “things worth reading”, for the full details of these reforms), and so I scrabbled about wondering what happens as we go forward.

Then, bearing in mind that this process began with the death of Lehman
Brothers due to the issues of Credit Derivatives and the US subprime
markets, I think I found a model that may lead the way.

This is based upon the work of Elisabeth Kubler-Ross, who places grief into five stages: denial, anger, bargaining, depression and acceptance.

First, Denial.  Denial is only a temporary defense and is used extensively by a bank CEO on the defensive. Examples include: “We don’t do sub-prime so we have not perhaps been exposed to some of the more boisterous elements of the market that others have.”  Fred Goodwin to City Analysts, June 2007

Second, Anger.  The second stage is when the banks and regulators recognise that denial cannot continue. Examples include: “It's more devastating than I care to discuss. There's a lot of anger and feelings of uncertainty.” Lehmans employee, asked how he felt when clearing out his desk, September 2008.

Third, Bargaining.  The third stage involves the hope that death can somehow be delayed. Examples include: “The world needs China and the US to pull together rather than rattle their sabres at one another. How can the joint interests of the two economies be brought to the fore when the tendency is to turn inward?
There is a solution: a grand bargain between China and the US on macroeconomic policies and international economic affairs.” Eswar Prasad, Financial Times, January 2009.

Fourth, Depression.  During the fourth stage, the industry begins to understand what death has meant. Examples include: “Mike Mayo’s Seven Deadly Sins of Banking, April 2009: Bank Losses To Exceed Great Depression.  The seven deadly sins of banking include greedy loan growth, gluttony of real estate, lust for high yields, sloth-like risk management, pride of low capital, envy of exotic fees, and anger of regulators.”

Finally, Acceptance.  This final stage comes with peace and understanding of the death, what it meant, and how to live with it. Examples include: the free market was "the most powerful force for our prosperity" but "we should not accept a system that consistently puts [us] in danger". Barack Obama, announcing the bank regulatory reforms yesterday.

Let’s hope the reforms work to avoid any more deaths in the industry.

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  • Hmmm – unfortunately the five stages of grief has never been empirically verified, and has in fact been quite thoroughly debunked.
    Oh well – interesting read nonetheless 😉

  • Hmmm – unfortunately the five stages of grief has never been empirically verified, and has in fact been quite thoroughly debunked.
    Oh well – interesting read nonetheless 😉

  • Chris,
    I doubt they will. Adding more regulators with differing priorities into the US market is not, IMHO, the solution to the problem. To me the problem in the US is that because they have a large number of regulators there is no clear responsibility and too much opportunity for buck-passing. In the end no one wants to be the one to call “time” and actually be blamed if they got it wrong. Additionally, no one regulator has a full picture of a bank’s position.
    The handing of the responsibility for systemic oversight to the Fed is a step forward, but if they do not have the ability to also monitor the banks at a micro level then they will have no clear idea of which banks are good or bad when they try (in the future) to restore confidence.
    I can only see the proposed changes as making the US system more prone to these sorts of issues in the future – not less.

  • Chris,
    I doubt they will. Adding more regulators with differing priorities into the US market is not, IMHO, the solution to the problem. To me the problem in the US is that because they have a large number of regulators there is no clear responsibility and too much opportunity for buck-passing. In the end no one wants to be the one to call “time” and actually be blamed if they got it wrong. Additionally, no one regulator has a full picture of a bank’s position.
    The handing of the responsibility for systemic oversight to the Fed is a step forward, but if they do not have the ability to also monitor the banks at a micro level then they will have no clear idea of which banks are good or bad when they try (in the future) to restore confidence.
    I can only see the proposed changes as making the US system more prone to these sorts of issues in the future – not less.

  • Chris Skinner

    @Gerhard
    Understood. There are various camps who subscribe to the view of Ms. Kubler-Ross … and just as many who do not. It’s pretty subjective as to whether the five stages work or not.
    @Ozrisk
    Funnily enough I was thinking of writing a debate about the tensions between the politicians, regulators and central banks, and whether the reforms could actually sort that debate out.
    I think, as you, it will be a matter of time and no-one is likely to want to be the one to call ‘time’.
    Chris

  • Chris Skinner

    @Gerhard
    Understood. There are various camps who subscribe to the view of Ms. Kubler-Ross … and just as many who do not. It’s pretty subjective as to whether the five stages work or not.
    @Ozrisk
    Funnily enough I was thinking of writing a debate about the tensions between the politicians, regulators and central banks, and whether the reforms could actually sort that debate out.
    I think, as you, it will be a matter of time and no-one is likely to want to be the one to call ‘time’.
    Chris