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Dr Vincenzo Bavoso is a researcher in the Department of Law at Durham University on Work Package 2: Financial Crisis in the Banking Sector of the Tipping Points project. He is looking at the role of law and legal institutions in preventing financial crises and limiting systemic risk in financial markets. In this interview he talks about his research in financial scandals and how regulation can help make financial markets accountable to democratic societies.
In your research what financial scandals did you investigate?
When I examined financial scandals for the purpose of my research I focused on the accounting scandal age from 2001-03, along with Northern Rock and Lehman Brothers in the context of the recent global financial crisis. Financial scandals are caused, among other things, by mismanagement, and lack of understanding of certain processes. All of this is based on certain failures of regulation. You would expect there would be supervision in place and in all of these examples of large organisations with lax or flawed managerial processes, it was not.
Do you think these scandals mainly exist due to a failure of regulation or do you think something within the financial system allows some of these events to occur?
During a period of financial boom, such as the 1980s, the economist Hyman Minsky came up with a theory of financial instability. He thought the larger a financial system develops the more it will be prone to instability then eventually to crisis or a situation of default, which is something we experienced before the explosion of the global financial crisis. After that ‘tipping point’ if you will between 2006 and 2007 it went from boom to bust. The problem is that when you’re in a period of boom nobody seems capable of recognising what the limits of the system are. Nobody seems to be able to see that the system is not resilient or if an individual or institution does raise red flags they are not heeded. Read the rest of this entry »
For those of you who may not have come across the latest Tipping Points Annual Report yet, it provides the latest updates from the project. Tipping Points is now entering its fourth year of interdisciplinary research in climate change, the global financial crisis, mathematical tipping points and the tipping point metaphor itself.
Since the project started in summer 2010 it has questioned the fundamental understanding of tipping points in nature and society and has thus far produced a large body of work, with more publications to be uploaded to its website in the near future. This report includes field updates from paleoclimate research in the Arctic, historical bank failures in Britain, health tipping points and the agency of language.
Professor Ranald Michie tells the story of banking in Britain within the context of the Global Financial Crisis, starting with the failure of Northern Rock and other highly interconnected banks in the UK.
In September 2007 rumours began to circulate in Britain that the Newcastle-based bank Northern Rock was in financial difficulty. As these rumours gained in credibility, retail depositors rushed to withdraw their savings fearing that they would be lost if the bank collapsed. What these depositors were doing in public, as they formed queues outside the bank’s branches, had already happened behind the scenes throughout August. In the wake of the sub-prime lending crisis in the US, banks had become weary of lending to fellow banks in case they would not be able to repay them. That created problems for banks like Northern Rock as it had adopted a business model that made it dependent upon short-term borrowing from other banks to finance its aggressive expansion of long-term mortgage lending. As new funds provided by other banks dried up and the date on which many existing loans had to be repaid, Northern Rock had no alternative but to seek assistance from the Bank of England, the traditional lender of last resort under these circumstances.
The ‘run’ on Northern Rock
It was while the required assistance was being negotiated, involving a protracted delay because responsibility no longer lay with the Bank of England alone but was shared with the FSA and the Treasury, that the story broke that Northern Rock was in difficulty. Faced with panic among the depositors, and the possible spread of their actions to all British banks, the UK government was forced to intervene and guarantee bank deposits. In many ways Northern Rock was unfortunate as the timing of its borrowings from other banks put it first in line to require assistance when these funds dried up. It could equally well have been any of the other ex-building societies and even a number of those that had not de-mutualised, as they were all operating the same business model.
If the crisis had ended with the collapse of Northern Rock, and its belated nationalisation early in 2008, then it would forever have been associated with that single bank and its cause blamed on poor management. Even if the crisis had stopped with the disappearance of all those building societies that had converted into banks, as did happen, then the story would be about a failed experiment and attributed to the transformation of the British financial system begun by Mrs Thatcher’s Conservative government in the 1980s. However, even in Britain the crisis went much further than a set of specialist mortgage lenders, as these were not too big or interconnected to fail as none played a major role in the provision of short-term credit or were central to the operation of the payments system. With hindsight the need for the government to intervene might have been subject to serious questioning along with the scare tactics used by the media in pursuit of a scoop. Instead, the near collapse of the two largest Scottish banks, Royal Bank of Scotland (RBS) and HBOS, and the massive intervention required by the government to save them, is what really brought the crisis to a head in Britain. Read the rest of this entry »
IHRR’s Tipping Points project will be at the 2013 British Science Festival in Newcastle with the event Tipping Points in Nature and Society on Wednesday, 11 September. You can now book this event on the British Science Festival’s website. We have put together a fascinating group of presentations for the festival and plan to have some exciting discussions about critical thresholds that affect nature and society. How does a bank network collapse? How can we better understand present and future climate change? How do terms like ‘tipping point’ spread? Do they have meaning or are they simply meaningless buzz words? These plus a series of other related questions will be explored at Tipping Points in Nature and Society.
Critical Transitions in Climate
What can studying the climate of the distant past tell us about our present climate? Rapid changes in climate have occurred in the past, long before direct measurements were made, but are these ‘tipping points’ in the climate system? Does irreversible change happen? Climate scientists Professor Antony Long, Dr Eleanor Maddison and Dr Sarah Woodroffe will help shed some light on the mystery of abrupt environmental change by introducing how studying past climate change can help us understand what changes may be in store for our planet in the future. Read the rest of this entry »
The new annual report from the Tipping Points project is now available.
It features the latest research updates from all five work packages of the project:
- Trust and maintaining resilience of financial markets
- Development of UK banking sector
- Field research on past climate in the North Atlantic
- Tipping points in populations of UK banks and ‘titanic moments’
- Use of ‘tipping point’ in popular culture and in discussions about climate change
Plus much more!