Knowledge and Crisis - a case of knowledge and learning failure - - by bankers , shareholders , auditors , accountants , rating agencies & regulators

Regulators such as Turner (2009) have identified excessive securitization, high leverage, extensive market trading and a bonus culture, as being major factors in bringing about the bank centred financial crisis of 2007-9. The core idea of this paper is that a lack of banking knowledge and history amongst bankers, shareholders, auditors, accounting bodies, rating agencies and regulators, was also deeply implicated in the crisis. Addressing this knowledge gap and its causes will be part of the solution to the crisis. The paper develops a framework for understanding the role and application of knowledge in banking and suggests how banks can institutionalise learning and actively create new knowledge through time to improve bank organisation, intermediation, and risk management. Similar arguments for learning concerning banks and banking can be extended to shareholders, auditors, accounting bodies, and rating agencies. The institutionalisation of banking knowledge across banks, shareholders, auditors, accounting bodies, rating agencies and regulators, ought to constitute an important element of any sustainable solution to the problems currently being experienced by the banking sector. By ensuring greater learning, knowledge creation, and knowledge use (concerning banks), governments, regulators and others could help reduce individual bank risk and the likelihood of future crisis. Introduction Turner (2009) summarised the reasons that led to the bank centred financial crisis in 20072009, as including, massive growth in securitised credit, securities trading, leverage and excessive dependence on short-term capital market funding. It seems that both the ratings agencies and the “sophisticated” mathematical risk management models seriously underestimated the risks associated with such a strategy and the “bonus culture” and high leverage greatly encouraged excessive risk taking by rewarding apparent success (luck) but not penalizing failure. However, the core idea of this paper is that knowledge and lack of it was also deeply implicated in the crisis and in many of the above problems, and hence addressing these issues will be part of the solution.