Current Crisis: Caused By Bad Bank Management Or Banking Structure?

The graphic below depicts the history of various Investment Banks over the years:

Graphic courtesy of the WSJ

So the obvious take away from all of this is that the lines between I-Banks and Commercial banks were established in the aftermath of the great Depression, as the thinking was that the combination of the two contributed to the crisis. Now here we are not even ten years after the repeal of Glass-Steagall and we’re facing the biggest financial crisis since the great depression; while begs the obvious question: are the two related, or is the crisis more of a function of the way the banks behaved as opposed to how they were structured?

If you ask me the answer is fairly clear: the problems we’re having now are primarily a function of risk management, bad lending standards, the explosion in the use of derivatives and the resulting problems of under capitalization and over-leverage. While I think that repealing Glass-Steagall and the implementation of Gramm-Leach-Bliley were indeed part of the problem, it doesn’t change the fact that combining I-Banks and a Commercial Banks didn’t force executives to begin acting foolishly.

I.e. if the banks had been managed better (regardless of their structure) the current crisis simply wouldn’t have happened.

Obviously this question will be debated for well into the current century and it’s not a stretch to say that we haven’t seen the last of the legal wrangling over the structure of banks, not to mention more changes within the banking sector.

The graphic comes from a WSJ article that discusses the issue in more detail and you can read it here.

Source:

The WSJ: “Walls Come Down, Reviving Fears of a Falling Titan” — David Enrich, Damian Paletta, September 23, 2008.

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