Banks trying to maintain profit growth in an era of low interest rates and executives who refused to think the unthinkable were responsible for the financial crisis and crucial lessons remain to be learned, says the CEO of Equitable Life.
Speaking on the 10th anniversary of the collapse of Northern Rock, Chris Wiscarson, current chief executive of Equitable Life, which itself collapsed seven years before the financial crisis, says that lessons were not learned from the insurance company's 2001 downfall and that there are lessons the financial services industry must still learn.
He begins with a quote from March 2007 by Ben Bernanke, then chairman of the US Federal Reserve: "The impact of the broader economy and financial markets on the problems in the sub-prime market seems likely to be contained."
"This failure to think the unthinkable at the very pinnacle of financial governance is something that has to be addressed and, in truth, it hasn’t been," Wiscarson says.
Low interest rates
The era following the dotcom bubble saw interest rates lowered to multi-year lows and in many large economies they have never again reached the levels that were seen as normal in the 1990s or 1980s.
For Equitable Life, guaranteed annuity rates of 5% or more were unsustainable. For many banks, maintaining profit margins was equally difficult and the problem could only be addressed in one way: make more money.
Financial institutions had essentially three means of doing this:
- Sell more
- Charge more
- Cost less
Consumers don't take kindly to charges for services such as banking. Meanwhile, cutting costs in the ways then available to banks – closing branches – is hugely unpopular with the public.
This left selling more. Selling more requires innovation and innovation entails greater levels of risk.
“Complex products and risky business models were significant contributors to the Equitable Life and Northern Rock crises," says Wiscarson.
And, of course, it turns out the whole global industry was up to it. Once the US subprime mortgage market and its credit derivatives popped, most major banks were exposed and the biggest casualty became Lehman Brothers in September 2008.
Thinking the unthinkable
A typical response to history repeating itself has always been: "This time it's different."
This, says Wiscarson, was the mantra in the months leading up to the financial crisis.
A combination of poor governance, steadfastly secretive corporate culture and the lack of any experience in the financial sector of crisis management exacerbated and lengthened the crisis.