Bigger than Barings: banking crises have been averted, but how safe is your capital?
- Amid systemic failures and fear of contagion, authorities have acted quickly and sought to protect depositors
- But the challenge remains to ensure moral hazard, such that the people who make financial mistakes pay the price
On the morning of February 26, 1995, I was awoken in a Swiss mountain lodge by the BBC World Service news on my Sony shortwave radio. The signal was indistinct (this was pre-digital) and I gleaned through the ether that a famous British bank had gone bust – but I could not catch the name. I had to wait 30 minutes for the headlines, and a clearer signal, to hear that the 233-year-old Barings Bank had gone under.
Barings suffered from a lack of controls that allowed a rogue trader to build up a massive loss. The authorities avoided the issue becoming systemic or contagious for the financial system by managing a takeover of the remaining assets by the Dutch ING Bank.
The one positive theme running through these failures is that the various authorities acted quickly to deal with the problems. The leaks were plugged before the dam burst, even if each failure uses up a little more of the regulators’ financial ammunition and reputation. It gives other financial institutions time to ensure their capital is secure and to learn from the mistakes of others.
The stock markets have taken the collapses well, unhealthily taking the view that big government will support them in a crisis. The nature of the business is that each bank has close links with other banks and, if one goes down, there is a chance that others will too. Banking is a confidence trick, but governments have to support banks – even those badly run by profligate, avaricious incompetents.
It is an industry that has brought the world out of poverty and is vital to society. Confidence must be preserved, even if rich people are the biggest beneficiaries in a rescue, because it is the ordinary person with a few thousand in the bank who stands to lose most.
The challenge for the authorities is to ensure moral hazard, such that the people who make financial mistakes pay the price – and not the small bank account holder who has few resources and an even smaller voice. That is why many countries guarantee the deposits for their nationals up to a certain level.
The Baring’s crash taught me that investors can lose money when bonds fall, and they are likely to lose more if equities fall, but you can lose all your money if you have cash in the wrong bank. However, at the moment, it seems that the authorities will bail out small to medium-sized depositors – so your capital should be safe in the bank, even as inflation is likely to cheapen it.
All savers believe they must have the choice to lose, spend or give away their money in the way they want – not lose it in someone else’s scandal. As billionaire financier and philanthropist Dan Gilbert said: “Anyone who dies with money in their bank account is a failure.”
Richard Harris is chief executive of Port Shelter Investment and is a veteran investment manager, banker, writer and broadcaster, and financial expert witness