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How to spot a financial institution in stress

We had a really interesting discussion at the Financial Services Club this week with Charles Thomson, former Chief Executive for the Equitable Life.

The Equitable Life is a financial institution that failed at the end of the last decade and it was notable that many of the reasons why I failed are similar to those of today with the Royal Bank of Scotland, HBOS and Northern Rock.


  • Management were arrogant and aggressive in creating a growth strategy
  • Sales was the singular focus, and the company had the best salesforce of all the life companies of Britain
  • Products were sold that sounded too good to be true, and they were
  • Customers were sucked into these products and, years later, it turned out the company did not have the capital adequacy to pay on their promises
  • The numbers people – in this case, actuaries – had miscalculated market movements badly and had only accounted for boom markets rather than bust ones
  • The regulators were afraid to challenge the firm and the firm was viewed as the most successful in its sector, based upon its results and cost-income ratio

All in all, the story was one of highly geared finance run amok, with no-one to challenge the logic.

In fact, what struck me about this story, along with those of our banks, is that it is very easy to make a financial firm look good if you run it like a Ponzi scheme.

A Ponzi scheme borrows from one to give to the other.

The other sees a good return on their money, and so they give more money which you then give back to the one.

Like a Ping-Pong game, a Ponzi scheme just shifts money around the system so everyone thinks they’re getting a great deal when, in reality, it’s just one small pot of gold that’s leveraged t to the hilt through magical sleight of hand.

That’s what Equitable, Northern Rock and others did.

They weren’t being run as a Ponzi scheme, obviously, but they were shifting money from wholesale markets to retail through securitised lending or shifting money from customers into funds they thought would always increase on top of the bonuses, but that were ultimately unsustainable.

And that’s where a regulator should really focus.

If you find a financial institution that’s leading the pack, growing fast, showing leadership in cost-income, gaining market share, offering products that are far more competitive than anyone else in the industry and demonstrating a clear swagger of confidence that no-one dares to challenge …

… challenge it, as somewhere lurking under that shiny veneer may be stinking mess of assumptions that prove to be totally wrong.

In other words, the time to test whether a financial institution is in stress is when it is having its greatest success.


About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.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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