Human weaknesses to blame for financial crisis, experts say

Apr 21, 2011

One of the first in-depth ‘insider’ studies of the financial crisis has blamed ‘human’ failings for the meltdown and called for urgent reforms to prevent a repeat.

A report by an influential group at Nottingham University Business School has revealed industry figures place little emphasis on economic and market factors when asked to explain the collapse.

Instead they believe a dangerous risk culture — brought about by regulatory and management weaknesses and poor communication — was at the heart of the turmoil.

The study’s findings are based on interviews with senior risk-management professionals and a subsequent roundtable discussion by a panel of industry experts.

Research author Dr Simon Ashby, an Associate Professor of Financial Services in the Financial Services Research Forum, said: “Every new report on the crisis seems to emphasise different priorities. But one problem with many of these reports is that they’re produced by outsiders looking into the sector rather than insiders looking out.

“It might be argued insiders have made such a mess of the system that they shouldn’t have a strong voice in the debate, but this overlooks a valuable perspective. The fact is that many institutions chose not to participate in the excessive risk-taking that preceded the crisis and so have as much right to comment as anyone.”

The forum is widely regarded as the UK’s most inclusive body for furthering the understanding of financial behaviour. It is unique in bringing together all stakeholder groups, including regulators and government, to inform policymakers in the public, private and voluntary sectors.

Its research identified “human and social factors” — particularly weaknesses in risk management on the part of institutions and regulators alike — as key to the crisis.

One risk manager told researchers: “It’s human behaviour. Everything else — governance, culture, capacity — comes off the back of that. It all comes back to the person.”

Another said: “The culture of the whole organisation was sales-driven. The risk people weren’t rewarded — there was no incentive for them to stand up and challenge.”

Those questioned also criticised the role of regulators in encouraging a “box-ticking approach” that did nothing to incentivise the effective management of risk.

One said: “Regulators might have great theoreticians, but what they absolutely need is people who know how real life works. That’s where they fall down.”

Another added: “Regulators don’t really get what’s going on beneath the surface. They’re not streetwise enough and don’t understand some of the people aspects.”

The report also challenges the notion that reforms such as greater capital requirements or caps on bonuses and payments might help prevent a future crisis.

Dr Ashby said: “Capital shouldn’t be regarded as the be-all and end-all. It’s just one of the many tools that can be used to control the effects of major loss events. To believe greater capital requirements will solve the problem is like encouraging motorists to fit bigger airbags rather than urging them to be safer drivers.

“As for bonuses, the issue is more complicated than simply blaming the crisis on ‘greedy’ bankers. High levels of compensation aren’t necessarily a bad thing. It’s the rules of the game that were at fault. Incentives arrangements were short-term and sales-driven, which encouraged senior management to take excessive risks.

“Bonuses should be awarded over longer-term performance horizons, aligned with risk-management and governance policies and reinforced by a strong risk culture.”

The report recommends sweeping changes in risk culture, including improved training, heightened awareness at board level and greater transparency for stakeholders.

Dr Ashby, who is also associate professor in the School of Management at Plymouth Business School, said: “The global was ultimately caused by management weaknesses.

“As such, it could have been prevented — and if the right changes aren’t made now to make financial institutions more reliable then a similar crisis could well happen again.”

Forum Director Joanne Hindle said the study and its findings were deliberately “practitioner-focused” and intended to help map out a way forward for the industry.

She said: “Our recommendations are designed to ensure lasting change while still giving financial institutions the necessary freedom for innovation and growth.

“Risk management should be viewed as a mechanism for supporting business decisions rather than as costly red tape. There has to be a more strategic focus.”

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Provided by Nottingham University

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User comments : 34

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rgwalther
2.3 / 5 (3) Apr 21, 2011
'Expert': "Ex' is a has-been and 'Spert' is a drip under pressure.
TheGhostofOtto1923
1 / 5 (2) Apr 21, 2011
Well we wouldn't be having these problems if we just outlawed usury, right marjon?
ironjustice
1 / 5 (2) Apr 21, 2011
Seems to me the ONLY reason these guys were found out was because the gangs 'got wind' of HOW these guys were ripping us off. The gangs THEN got involved and THEY did it a little more 'sloppily' than those 'insiders' that were involved in the rip off of our society and thusly it became SO APPARENT what these insiders were doing that we caught on but too late. As to the insiders who figure their 'input' MUST be considered ? IF a gang can catch on to a ripoff WHY didn't the insiders catch on to it BEFORE the gangs ? The same reason doctors don't rat out their pals in the medical profession. They lack morals and empathy. Imho.
SteveL
5 / 5 (2) Apr 21, 2011
If you loan money to people who don't have the means to pay it back - eventually they won't be able to.

There was irresponsibility on all sides in this mess. The legislators for deregulating the financial institutions too much - too quickly, the loan industry for using the wrong business models and for not properly securing thier assets, and the consumers for taking loans that they never could afford in the first place.
ironjustice
3 / 5 (2) Apr 22, 2011
Quote: There was irresponsibility on all sides in this mess.
Answer: It was the insiders. It was the people EMPLOYED in the industry who ripped off the 'little guy'. They STILL .. as you evidence .. TRY to convince the 'little' the little guy contributed to the ripoff was MUCH more than they actually did. They tell us you shouldn't live beyond your means when in fact the insiders twisted the books to convince the little guy he was ABLE to pay for a home for example. The ripoff of our society was perpetrated by 99.9% by insiders. The WAY to go about this ripoff was begun by a British Canadian high school dropout.
Believe it or not.
rwinners
3.7 / 5 (3) Apr 22, 2011
Irresponsibility? Yes. Greed, manipulation, fraud, malfeasance? Those too.
The bankers, the real estate industry, the real estate appraisers and those who packaged and resold mortgages all knew what was happening, were part of it or ignored it, profiting from it hugely.
ryggesogn2
2 / 5 (4) Apr 22, 2011
"brought about by regulatory and management weaknesses "
AKA bad govt policies.
"The global financial crisis was ultimately caused by management weaknesses."
Govt management weakness?
When US govt agencies are guaranteeing bad mortgages, who was weak?
And when the US Fed pushes cheap money, who is weak?
rwinners
not rated yet Apr 22, 2011
Oh, and if you think no one in government had any idea what was happening, you've been living on another planet .. in another galaxy.
ryggesogn2
1 / 5 (3) Apr 22, 2011
Oh, and if you think no one in government had any idea what was happening, you've been living on another planet .. in another galaxy.

If you are suggesting the govt knew what they were doing you give them way too much credit.
Some thought they knew what they were doing, but those unintentional consequences crept in.
Of course the 'progressives' will use any excuse to grab more power, and they have. But I don't give them credit for planning the collapse. Even Barney Frank admitted he was wrong to push mortgages people could not afford.
ryggesogn2
1 / 5 (2) Apr 22, 2011
Risk management should be viewed as a mechanism for supporting business decisions rather than as costly red tape. There has to be a more strategic focus.


When the state socializes the risk, don't blame private company managers for being weak.
ryggesogn2
2.3 / 5 (3) Apr 22, 2011
The govt punishes mangers for NOT being weak:

"A Massachusetts bank that has defied the odds and remained free of bad loans amid the economic crisis is now being criticized by the Federal Deposit Insurance Corp. for the cautious business practices that caused its rare success."

http://www.foxnew...,00.html

"Joseph A. Petrucelli is one of the most cautious bankers in America.

In fact, Petrucelli is so cautious that the Federal Deposit Insurance Corp. recently criticized his bank for not lending enough.

Read more: Community bank finds paranoid a smart bet | Boston Business Journal
"
http://www.bizjou...ry3.html

danpi8ter
3.5 / 5 (2) Apr 24, 2011
Anyone who blames a home buyer for the crisis is a moron, plain and simple. The home buyer knows what they can afford as a payment. The banks knew people couldnt afford these loans, especially when the variable rate finally came into effect. People were told the rates would go up, but they were told to not worry about it, because by the time it does go up, the consumer would have received raises at work or other forms of monetary gains. These are the words mortgage brokers were told to say to their customers, while these institutions were givng out these loans by the truckloads. As we know, salaries really havent gone up in the last 30 years and the banks knew this. This was all about greed. The banks, the gov't at the time, knew exactly what was going on. There was a lot of money made during the crisis, just not by the people on Main Street. They lost their shirt and their house, by these deceptive practices.
ryggesogn2
1 / 5 (2) Apr 24, 2011
There were a few savvy home buyers who made out quite well.
'Immigrants' from Brazil purchased a property in Lowell, MA with a no down mortgage. A few months later, they 'sell' the property to a family member who obtained a similar low cost mortgage at a profit as the property values kept climbing. When the music stopped, they went back to Brazil, defaulted on the loan with thousands of dollars profit.
I'm sure this happened more than once.
Vendicar_Decarian
0.2 / 5 (36) Apr 25, 2011
"AKA bad govt policies." - RyggeTard

Which were the from the Libertarian and Randite ideology driving the Conservatives who lowered the regulatory standards.

"The global financial crisis was ultimately caused by management weaknesses."

"Govt management weakness? " - RyggTard..

No. Management failure in the banking industry.

Government doesn't "manage" the banking industry... Tard Boy.

Government regulates it. And disastrous Republican governments that largely deregulated the industry - regulated the banks inadequately as per the instructions of their Libertarian and Randite ideological governors.

"When US govt agencies are guaranteeing bad mortgages, who was weak?" - RagguTard

You certainly have a weak and confused mind.
Vendicar_Decarian
not rated yet Apr 25, 2011
"Immigrants' from Brazil..." - RagguTard

Libertarian/Randite failure knows no bounds.
Vendicar_Decarian
0 / 5 (35) Apr 25, 2011
"When the state socializes the risk" - RygguTard

Since the banks had already collapsed, the risk had clearly already been socialized.

Just not in a manner that LiberTards or Randite Tards are capable of comprehending or honest enough to admit.

Vendicar_Decarian
0.4 / 5 (37) Apr 25, 2011
"There was irresponsibility on all sides in this mess." - whatever

The FED could have prevented the crisis, but the Libertarian/Randite ideology of Alan Greenspan prevented him from even acknowledging that there was a problem.

In the Libertarian/Randite view, corporations need no regulation since they will never act in a manner that is contrary to their well being.

After the collapse of the banking industry, caused by the industry acting in a manner that was contrary to it's well being. Greenspan - recanted his life long held Libertairan/Randite Liedeology.

His change of mind, of course, didn't correct the crash, and now they are back to promoting the same old deregulatory poison that caused the problem in the first place.

These are the same ideologically driven group that is running the Conservative Propaganda campaign against the science of Global Warming.

rynox
5 / 5 (1) Apr 25, 2011
It's become very unfashionable (and even suspicious) to question Capitalism, but it's time to wonder if there is a better way.
Silver_the_Fox
not rated yet Apr 25, 2011
Ladies and Gentlemen, no need to hammer on the US too hard now, yes they've been complete idiots in assuming that LARGE BUSINESSES wouldn't take any risks or attempt to keep all the money to themmselves (upper management), and yesthey probably saw something coming over the horizon (the recession) and said it was only a small wave, and sure they completely screwed over the younger generations (i.e. the classes of 2013 - 2020), but you dont have to hammer them so hard.

If you want to play the blame game all day and complain about it until you run out of breath, so be it. But how about doing the best you can in today's economy (meaning the world economy since they are also one of the reasons that we have such a high unemployment rate)?

If I sound like a ill-informed, blame it on skewed news reports and govt tampering in the newsrooms (BRIBES!!)...

I most certainly do...

Silver out.
ryggesogn2
2 / 5 (4) Apr 25, 2011
It's become very unfashionable (and even suspicious) to question Capitalism, but it's time to wonder if there is a better way.

Yes, the better way IS capitalism. REAL capitalism without state socialism. That hasn't been done for over 100 years.
ShotmanMaslo
3 / 5 (2) Apr 25, 2011
The crisis was caused both by bad regulation where it shouldnt be - encouraging banks to provide subprime mortgages + cheap credit conditions fueling the bubble, AND lack of regulation where it should be - deregulation of safety measures of financial markets.

BOTH are to blame.
beelize54
2.5 / 5 (4) Apr 25, 2011
The human weakness is the main problem of both laissez-faire society, both communism. These social arrangements would both work perfectly, if only people wouldn't such a whores...
ryggesogn2
2 / 5 (4) Apr 25, 2011
Free markets acknowledge human 'weakness' and market forces respond quickly and harshly to human weakness.
Skeptic_Heretic
5 / 5 (5) Apr 25, 2011
Free markets acknowledge human 'weakness' and market forces respond quickly and harshly to human weakness.

The free market exploits human weaknesses, and they certainly do act quickly to take advantage of them.
Yes, the better way IS capitalism. REAL capitalism without state socialism. That hasn't been done for over 100 years.
Neither has bloodletting, because it doesn't work.
beelize54
1.8 / 5 (5) Apr 25, 2011
The free market exploits human weaknesses, and they certainly do act quickly to take advantage of them.
I do agree in full extent. There we can read, more than 40% of research time is dedicated to grant seeking. The ineffectiveness of laissez-faire system is comparable here to the ineffectiveness of government-intervened system: just the dissipation of resources occurs inside of individual subjects of the market instead of outside of them.

http://www.scient...no-money

AWT learns us about deep symmetry between capitalism and communism: we cannot say, one system is fundamentally better, than the another one - they just differ in the way, in which the dissipation of resources occurs.
ryggesogn2
1 / 5 (3) Apr 25, 2011
AWT learns us about deep symmetry between capitalism and communism: we cannot say, one system is fundamentally better, than the another one - they just differ in the way, in which the dissipation of resources occurs.

What is AWT?

"Capitalism is a social system based on the recognition of individual rights, including property rights, in which all property is privately owned. Under capitalism the state is separated from economics (production and trade), just like the state is separated from religion. Capitalism is the system of of laissez faire. It is the system of political freedom. " http://capitalism...lism.htm
That is quite the opposite of communism in which private property is not allowed.

Howard Hughes did not become a billionaire by following communism.
Silver_the_Fox
not rated yet Apr 26, 2011
Ryg, not to burst your buble, but, if the govt stays out of the affairs of the US Economy (or what remains) then why did they put in over 1 trillion dollars into it? What was that thing called again? oh yeah, the stimulus bill. Capitalism is the greatest source of joy in the world, and the greatest source of misery. Oh yes, and one more thing:

That is quite the opposite of communism in which private property is not allowed.


If you look at Gorbechef, he let people have a communist government, with some private control over what they owned. Next thing you know, They are a world power. He enacted Marxism, Thus, he created something that you can learn alot from. Open Market is Death, Controlled Market can be used to distribute the wealth to many people who would otherwise starve due to lack of funds.

Any Questions?
Silver out.
ryggesogn2
2 / 5 (4) Apr 26, 2011
What was that thing called again? oh yeah, the stimulus bill.

First, the govt caused the problem. Second, their 'fix' has not worked has it?

he let people have a communist government, with some private control over what they owned.

What a great guy!
Why did Gorby let people keep more of their own property? To try and stave off the inevitable collapse. He failed.

Skeptic_Heretic
5 / 5 (1) Apr 26, 2011
You don't even read what you write/quote mine.
Capitalism is a social system based on the recognition of individual rights, including property rights, in which all property is privately owned.
So it's a social system.
Capitalism is the system of of laissez faire. It is the system of political freedom.
Wait, how is it a political system?

Oh right, it isn't. No wonder you're confused as to what these terms mean. You read garbage opinion pieces. GIGO.
Silver_the_Fox
not rated yet Apr 26, 2011
Actually, He has a good point, I find nothing wrong with this assesment? Anyone else agree with me on this?
SteveL
5 / 5 (1) Apr 30, 2011
Quote: There was irresponsibility on all sides in this mess.
Answer: It was the insiders. It was the people EMPLOYED in the industry who ripped off the 'little guy'.


I went to the bank in 2004 to borrow money against my house because my father had cancer (Non-Hodgkins Lymphoma - which he survived) and needed money. The bank said I could borrow 2 times what I knew I could afford pay back. Just because a bank says you can have more than you know you can pay back does not mean you should do it, unless your just stupid, weak or greedy. They tried to talk me into borrowing more than I needed and I told them a simple word I learned as a child: "No".
Silver_the_Fox
not rated yet May 02, 2011
I agree whole-heatedly, anyone can use that simple little word without any trouble, you just have to know when to use it.
SteveL
not rated yet May 03, 2011
Likely talking about Annual Wealth Tax, which is basically a net worth tax.
ShotmanMaslo
not rated yet May 03, 2011
According to Zephyr, AWT is apparently applicable not only to physics, but even to economics :D Thats what I call theory of EVERYTHING :D

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