How do you even begin to dissect the myriad of events leading up to the Global Financial Crisis?

Paul Moore, former head of group regulatory risk at HBOS (part of the Lloyds Banking Group since 2009), provides an explanation straight from the horse’s mouth. Moore was dismissed from his role in 2004, after he warned senior executives of the perils of excessive risk-taking. Five years later, HBOS was one of the UK’s most high-profile victims of the credit crunch, requiring a takeover and billions of pounds in government bailout money to stay afloat. Moore was the only senior risk and compliance executive in the UK banking sector to speak out publicly and dubs the crisis ‘the biggest quality failure of all time.’

It was during his time at American Express as head of compliance that Moore was charged with implementing total quality management – a project that saw him compete for the Baldridge award. He theorised that if the financial sector thought in terms of quality rather than risk, compliance or governance, and positioned culture and people above processes and structure, the events leading up to the crisis could have been avoided. Stringent governance processes mean nothing, Moore argues, if they are ‘carried out in a culture of greed, unethical behaviour and an indisposition to challenge.’

Moore points to the improper selling of pensions, endowment, home income plans, precipice bonds, interest rate swaps and PPI as examples of unethical behaviour. He draws parallels with the manufacturing industry, likening the devastating effects intangible financial promises had on consumer health and sentiment to ignoring risks associated with safety-related products (car brakes, tires, airbags, etc.).

Regulatory changes in response to the Global Financial Crisis have been significant. In general, there has been widespread recognition of the conflict of interest faced by many of the parties that had traditionally been responsible for identifying and quantifying risk. Specifically, the crisis has made clear that, in spite of what appeared to be individually sound and well-supervised financial institutions, well-functioning financial markets, well-diversified risks, and robust institutional infrastructures, systemic risks emerged, yet went undetected or not addressed for some time and then created great havoc. Policymakers were not thinking of the system as whole when engaging in risk management, with catastrophic results.

References:

• “5 Quality Failures that Shook the World” – Sam Miranda, processexcellencenetwork.com
• “The Regulatory Responses to the Global Financial Crisis: Some Uncomfortable Questions” – Stijn Clessens & Laura Kodres, International Monetary Fund