‘Financial supermarket’ not major cause of banking crisis

‘Financial supermarket’ not major cause of banking crisis

Some finance experts have said that universal model of banking
is not the main cause of the current global financial crisis.

While the Central Bank is ready to adopt the narrow model
banking practice, following the stress test it carried out on the banks,
analysts at a public lecture organised by the Association of Corporate Affairs
Managers of Banks (ACAMB) in collaboration with The Banker, a banking and
finance magazine, on Tuesday, in Lagos, said such action does not necessarily prevent
future crisis.

Brian Caplen, managing editor of The Banker Magazine, a
subsidiary of the Financial Times of London, said the future shape of the
financial system shows that each country will have to take the best choice on
which banking practice suit its economy.

Mr. Caplen, who spoke on the ‘Challenges facing banks globally;
how Nigeria stakeholders should respond,’ said the current global financial
crisis saw many universal and narrow banks collapsed, while some stood the test
of time.

He said banks globally got into trouble because of “lending to
poor credits and insufficient capital.”

He added that the search for profits and shadow banking also
contributed to the depth of the crisis:

“National asset bubbles were responsible for the financial
crisis in countries like Nigeria, Spain, Ireland, and the US, while too much
leverage and wrong funding model led to the fall of other countries.”

He said the crisis also occurred because regulators were not
looking out for how risk was building up in the financial system.

Lessons learnt

Meanwhile, Kingsley Moghalu, CBN deputy governor, financial
system stability, said the lesson learnt during the current crisis has shown
that “in order to ensure financial stability, finance must be connected to the
real economy.”

Speaking on ‘The global redesign of banking; the stake for
Nigeria,’ Mr. Moghalu said, “The challenge that faces the whole world is that
of whether or not we can ever prevent another financial crisis. We have seen
the rise of financialisation over the last 15 to 20 years.

“All sort of instruments have come into the market and they have
been trading to make a profit. In the process of profit making, I think a lot
of people have lost sight of what finance should be. They have seen finance has
an end in itself and, therefore, created some quite dangerous bubbles which
bust recently.

“When you have a bank that is into insurance, stock broking,
asset management, pension, and all sort of things, then that is a financial
supermarket; it’s no longer banking. And when you have financial supermarket,
it increases leverage, and that is a huge exposure to risk. You have much more
risk with the universal banking model than when a bank sticks to its core
business of banking,” he said.

Mr. Moghalu said to achieve global stability, “the macroeconomic
environment, business models, risk management, and enhanced regulations must be
paid attention to.”

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