Tue, Feb 10, 2009 - Page 9 News List

A banking vision in crisis: time to rethink its future

Modern ‘superbanks’ are vulnerable because of the vast diversity and complexity of their transactions. Long before the subprime mortgage crisis, Citigroup was hurt by the actions of its traders in London and Tokyo

By Harold James

Gradual integration of the potentially vast European capital market and the creation of cross-border European banks made it look as if a European breed of “superbanks” was emerging. Likewise, Japan responded to its banking crisis by creating large merged institutions, while the US repealed much of the depression-era legislation that restricted banking. Finally, after Mexico’s 1994 to 1995 peso crisis and the 1997 to 1998 Asian financial crisis, the US exported its new banking model to the emerging-market economies. Spanish and US banks moved heavily into Latin America.

The appeal was the opportunity for strategic vision, most clearly seen by Robert Rubin, first as treasury secretary in the administration of former US president Bill Clinton and then as an adviser to the new giant of US banking, Citigroup, which emerged out of a 1998 merger.

But the new superbanks were inherently vulnerable because of the vast diversity and complexity of their transactions. Long before the emergence of the subprime mortgage problem, Citigroup was damaged by the behavior of its London traders, who tried to manipulate the European government bond market, and by its Tokyo traders.

It is much simpler for a transnational manufacturing corporation to implement controls to ensure product quality. By contrast, in a company whose business is financial intermediation, millions of judgments are made independently and their implications may be serious enough to threaten the entire firm.

When the strategy goes wrong, the recriminations begin. Mid-sized European states cannot afford to have a strategic vision for their banks. But even for the US, the notion of a world held together by Citigroup’s business plan is simply too costly.

The vision of a bank shaping the economic fortunes of a country is as flawed as was the idea of central economic planning. In this sense, 2007 to this year is the capitalist equivalent of the communist demise of 1989 to 1991.

Harold James is a professor of history and international affairs at the Woodrow Wilson School, Princeton University, and professor of history at the European University Institute, Florence, Italy.COPYRIGHT: PROJECT SYNDICATE

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