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September 30, 2013

What We Learned From the Global Economic Crisis

Posted by Rajashekara V. Maiya (View Profile | View All Posts) at 10:09 AM

Infosys Finacle Mobile Banking - Simple, Secure, Future -Ready [Source:http://www.youtube.com/watch?v=qmvLX0eSl2Q]

Chances are you remember exactly where you were five years ago this month when the global economy began crashing down. "Financial Armageddon" was the term many an analyst and economist used to describe what happened during those frightening couple of weeks in September of 2008.

As with any traumatic event, we human beings tend to prefer not to think about what transpired. That's only natural. But if we can look back upon what led up to that meltdown and how our institutions handled it, we can learn a lot about how to prevent something like that from happening again. I think one of the positive things to have come out of the GEC is that banks are using technology in new and innovative ways, especially when it concerns their customers. Some aspects of mobile banking might be the keys to preventing another economic crisis.

First it helps to look at the crisis through both quantitative and qualitative lenses. If you view what happened quantitatively, a criticism might involve the sheer size of some of the banks - banks that were "too big to fail." Whatever your opinion on this matter, the American government made sure that many of those banks did not fail because of their Troubled Asset Relief Plan (or TARP). As a comparison, their neighbors to the north, the Canadian banks, tended to weather the crisis better because they'd taken fewer (and smaller) financial risks in the years leading up to the crisis.

In some cases, when the large Western banks coughed, smaller institutions in emerging markets, it was said, caught a full-blown cold. Yet another thing happened in the global capital markets: The emerging markets had low correlations to the West and actually made them popular with investors looking for any kind of growth during what was otherwise a dismal time for securities.

In the case of Lehman Brothers, the bank's unraveling might have had more to do with its positioning than with its assets. At least that's one theory tossed around by Henry Paulson, the U.S. Treasury Secretary at the time. Some of the banks that were deemed too big to fail were combinations of commercial and investment banks. Until the 1990s, combining those types of institutions under one roof was illegal. Experts, including Paulson, reckon that if you were to unwind the underwriting and investment banking activities from the commercial activities, you'd have a more stable and predictable system going forward.

On the commercial banking side we've experienced an explosion in mobile activities among consumers. Their proactive nature and newfound consumer power because of mobile devices and social media have helped make banks more responsive and customer-friendly. Lehman Brothers was one of the few large banks that didn't have a significant commercial banking presence. Hence its relationship to "Main Street" - people like you and me - wasn't on the line. There weren't millions of retail customers who were ready to demand that their savings bank not go under. It's one theory of many, of course. What happened to a pure investment bank does, I think, have something to do with the fact that it didn't have that commercial (and increasingly mobile) consumer connection.

There's no doubting that mobile platforms are changing the ways commercial banks operate. And how consumers perceive them. If used effectively, large banks across Asia, Europe, and the Americas can use mobility to strengthen consumer ties and perhaps prevent another meltdown. Why? Because the more transparent a bank's activities are, the easier it is to anticipate what could possibly go wrong in the future.

"Mobile" doesn't solely describe the changing nature of the banks themselves. It also captures the essence of the modern consumer. Armed with powerful, personal computing platforms, digital consumers have a global reach. They're able to provide banks with instantaneous feedback that will go a long way in preventing future economic and institutional meltdowns.

Remember: One of the overarching issues that defined the global economic meltdown was the nature of the debt instruments that many of the large banks had both created and propagated. At first, collateralized debt obligations were new and useful financial innovations that banks utilized amidst their quests to improve their balance sheets. But down the line those debt instruments ended up in the hands of people and institutions that couldn't account for them. Their sheer numbers didn't help, either. They'd grown so popular that no bank had the wherewithal to cover the potential losses when the day of reckoning came due.

Former Sec. Paulson recently said of the global meltdown that regulators now have the tools to wind down large banks. And they can do so in an orderly way. The test of these new regulations, however smart they may appear on paper, might only come in times of crisis. Indeed, from a regulator's point of view, we may very well have moved from considering too-big-too-fail to too-big-to-bail scenarios.

Until that time, the Main Street consumer, armed with a new array of mobile banking tools, might just be the most powerful deterrent from a large-scale banking collapse happening again soon.

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