The Economics of Banking

Back when I used to work in a bank, there were a whole bunch of different teams putting together complicated structured debt products, and dozens of people working in each of those teams, but they all had one thing in common: they were good at what they did.

Some had come in straight from university on the graduate recruitment programmes, CVs so packed with brilliance and relevant experience it exhausted you just reading the things. Some had left school and worked their way up and through, from the retail bank, the branches, the back office, people who knew the inner workings of the bank and how to get what they needed from it. Some had come in from other banks and had different and interesting perspectives on how we did things here. Some, like me, had come from other careers, law, accountancy, real estate, and were so full of technical expertise it would come bursting out of us at the least opportunity.

I can recall no more than a couple who had more than the vaguest knowledge of economics.

And isn’t that a joke? Isn’t that the biggest joke of all? We were good at what we were doing, we were the best, it’s true, but we had not the faintest understanding of what effect it might have on the wider world. Oh, sure, we could point to the companies we’d arranged finance for, on good, stable terms, companies that could now expand and buy other companies – and employ more people. Developers that could build new houses and offices and shopping centres – and employ more people. Other banks that could originate new mortgages and loans and credit card sales – and employ more people. All for the general good.

But that wasn’t really economics, was it? That was just looking at our clients and demonstrating that we’d done a good job for them. We didn’t link our own mortgage deals with a property bubble. We didn’t look so much at what happened with the investor side of things, at how interconnected everything had become, at how one butterfly flapping its wings in California could bring down a synthetic CDO in London. We learned on the job, picked up a general idea, maybe read a few columns in a few newspapers, but a proper, in-depth understanding of economics, of how money works? Completely beyond all but the few.

Of course it can’t be down to just one bank, but I’m assuming it was the same everywhere. What did we really know about what happened to our bonds once they left us? We could track them a step or two, to where they turned into repo collateral or got sold into a SIV, but after that? What about the repo counterparty? What about the SIV investors? What about their shareholders and lenders and the insurers writing credit default swaps on all of them? How could we possibly comprehend all the tentacles sprouting from just one apparently straightforward sub-prime RMBS deal?

Maybe a brief introduction to real economics might have made no difference at all. Maybe it would have made all the difference in the world. But for the next generation of bankers building the next set of products they think they understand – for them, surely, it’s worth giving it a try, isn’t it?

Liked this? Take a look at the opening chapter from the soon-to-be-published Without Due Care here.

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