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Avoid risks, learn from the financial crisis

Publication Date : 05-09-2012


Barclays Bank seems to have gotten into double trouble, this time the Libor interest rate-fixing scandal and payments to Qatar investors during the financial crisis, so much so that comments have surfaced suggesting that its new chief exectuive officer (CEO) go back to basics and hive off its investment banking arm.

“Back to basics" has been the rallying cry just following the 2008 financial crisis. Four years after that, one would expect more progress and not to have to go back to basics again.

Is that just another comment or suggestion that we can shrug off, or is it a sign that things just aren't right again?

It has been observed that the markets are fundamentally not strong and the European debt crisis is finally eating its way into valuations.

Over in the United States, Fed chairman Ben Bernanke had indicated at the recent meeting of central bankers at Jackson Hole that he was prepared to take action to prop up the still ailing US economy.

As a result, many are predicting a third round of quantitative easing or money printing by year-end.

Looking at some of these, among other factors, makes one think that it may be better to err on the side of caution than take on risky bids. In the wake of lessons learnt during the financial crisis, banks should heed early warning signals and start preparing for bad times.

It is not enough if just a few banks are turning wise; a collective effort or awakening is required for the full effect to cascade through the system.

The trouble is there are so many risks in the market. Just as in the last financial crisis when banks and others played with risky derivatives, this round seems to involve other risky transactions.

These transactions may involve exploiting loopholes which some may think is justified, but their exploits do not always have happy endings.

So far, there have a few bad cases involving heavy fines. If this carries on and blows up in the downturn, things can get dicy especially when money is needed for more productive uses.

The nature of misdeeds has become very unpredictable these days with investigators eager to show that they are going to be more alert this time.

It may be difficult to predict what is it that spark the next crisis but it will certainly be wise to avoid the places that even angels fear to tread.

Yap Leng Kuen is associate editor.


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