First post on finance, so a quick disclaimer that I probably don’t know what I’m talking about (I don’t work in the industry and I am not that knowledgeable about the inner workings, but am indirectly connected). Thus, do not rely on me for financial advice – my foray into investments was a Tech fund in December 1999. Make your own mistakes.

Thanks to Andrew McG for the link to this article in the FT on the current banking crisis:

The lesson he drew from the turmoil, he said, was not that his institution should have avoided leveraged lending and structured credit. It could not have, he said, because it would have offended customers such as private equity funds and its revenues would have lagged behind its peers.

No, he said, the moral was that his bank had to be on alert for the moment that an overcrowded market started to crack up and be adept at getting out in time. Banking in the 21st century involves nipping into all areas of financial markets where there are large fees and high yields and rushing out at the first signs of trouble.

So, it would offend important customers to not play in these markets when things are going well, but somehow it will not cause offence when you dump them at the first sign of trouble?

From the executive suite of a publicly quoted bank, this is logical.

Wonderful!

A bank must garner the revenues it can for as long as they last and hope that its risk management techniques are good enough to avoid trouble.

It would be interesting to know how much extra (if any) the banks are spending on risk management now compared to say a year ago. I heard at a conference last June that the risk management folk may be underfunded in things like computer purchases as this is not a profit-centre for the bank, unlike the portfolio managers etc. Perhaps now is a good time for the risk managers to ask for that new compute cluster.