Credit Suisse woes: can banks be cured at all?

Can banks be cured of their penchant for taking excessive risk? Or is banking an ailment for which there is no cure?

The question is prompted by the astonishing confession of the Chairman of Credit Suisse, Axel Lehmann:

It has become clear that the challenges of the past were not solely attributable to isolated poor decisions or to individual decision makers,” he (Lehmann) told the Swiss lender’s shareholders. “Within the organisation as a whole, we have failed too often to anticipate material risks in good time in order to counter them proactively and to prevent them.

Well, if a bank can't anticipate material risks, what are its executives getting paid for? The problem, I suspect, is not lack of awareness of material risks. It is the way incentives operate in banking: heads I ( the bank manager) win, tails you (the shareholder) lose. If a banking bet goes hugely wrong, the shareholders and bondholders are left holding the can. The manager, at worse, will lose his job. He won't starve as a result: he will enough millions to live off for the rest of his life. As long as there are no penalties, including criminal penalties, for irresponsible decision-making and as long as banks are leveraged the way they are, it seems futile to expect bankers to behave. 

Credit Suisse has got singed on account of exposures to high-profile collapses. It lost $5.5 bn on account of its exposure to the disgraced fund, Archegos. And its clients have  $10 bn of their money trapped at a failed fund, Greensill Capital. 

An investigation carried out by law firm Paul, Weiss at the instance of Credit Suisse remarked that the bank's losses that the losses were the result of a "fundamental failure of management and controls" at the bank and a "lackadaisical approach to risk".

Makes you wonder. If this is the quality of risk management at the one of the best known names in the world of banking, what does it say about the efficiency of foreign banks? What does it tell us about the functioning of the boards of top institutions? Is corporate governance an illusion? Does it make sense at all to talk of foreign banks coming in and acquiring underperforming public sector banks in India? 

I leave it to you to ponder.