Crying over spilt milk: learning from decades of banking crises

Banking crises have existed for almost as long as the very concept of banking itself. For something that seems so inevitable and reoccurring, perhaps we should reflect on the causes and consequences a little more than we currently do. We’re told we shouldn’t cry over spilt milk—but how else can we be serious about preventing such issues from happening again?

The fintech industry is new, at least when compared to traditional banking. Less set in its ways, it has the opportunity to learn from past crises.

So here are three things to cry about…or in other words, three lessons fintechs can learn from decades of banking crises.

Lesson 1 – Two inevitable laws

Murphy’s Law states that ​“anything that can go wrong will go wrong” and sometimes, “at the worst possible time.” Take the 2008 financial crisis, for instance, where an already declining American economy was exacerbated by a housing crisis. The simple lesson here is to prepare for the worst—not just something going wrong, but a combination of factors colliding.

Newton’s third law of motion can be simplified by saying “what goes up must come down”. The value of everything can fluctuate depending on a host of factors, for example, specific securities outperforming is by no means a guarantee they will stay that way. In fact, for any very high highs, there’s a chance that the bubble might soon burst. The dot-com collapse is just one example of this repeated tale, and the lesson, again, is to prepare for the inevitable.

Lesson 2 – It’s easier (and more profitable) to ask for forgiveness than permission—but safer to do the opposite

“Let’s package subprime mortgages with primes to give an illusion of security”. A very profitable idea at the time, but only because it ignored the role of risk and compliance—Banking can only be viable long-term if risk is properly understood. Recent casualties such as Silicon Valley Bank may have learned this the hard way—one reason cited for the bank run was a lack of visibility into certain risks—but fintechs don’t have to learn through experience.

Lesson 3  – balancing faith and fact: one of the many paradoxes of finance

Many paradoxes serve as pillars of the banking system. One is the combination of two opposites; faith and facts. Investors, customers, and other stakeholders need to have trust in any financial organisation for it to thrive. At the same time, proof of profitability or even solvency must also be present. Each needs the support of the other. Build solid models for prosperity to inspire confidence in your organisation.

Why are these lessons for fintechs, not banks? 

One can argue it’s banks who need the lessons—they have, after all, suffered from multiple crises since their inception. Because of this experience, banks have a better understanding and are potentially better equipped to deal with further crises down the line. Fintechs, on the other hand, are less experienced but could more easily change to head off these problems.

As banking is inherently risky and prone to volatility, there will inevitably be another crisis. However, the more the industry thinks about managing risks, the less impactful those risks become. It means quicker action with measures in place to deal with problems when they occur, ensuring a softer landing.

So if someone asks why a certain risk was handled so efficiently in the future, the answer would be simple: We cried when milk got spilt. We cried very loudly.

Written by Eyimofe Okuwoga

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