The Future Structure of the Industry: Implications of Re-regulation

The following quotation from Henry Kaufman, one of the best known bankers of the last 30 years (he was on the board of Salomon Brothers which is now part of Citigroup and latt erly Lehman Brothers) suggests that the conglomerate structure of the financial services industry that has developed since the 1990s has led to the creation of companies which have a risk incentive structure that is inappropriate for society's needs: Meanwhile, top managers at many financial institutions will find themselves in unfamiliar territory. Their mode of operating, their business culture, has been to pursue aggressive growth targets for profits and market share by diversifying operations into new financial domains and by swallowing up competitors. Wielding generous compensation incentives, managers of leading banks encouraged employees to take big risks. As institutions grew and diversified, their activities became too wide-ranging and complex for senior managers to oversee effectively. At the same time, risk-taking came to rely more and more on quantitative risk-modelling, which tended to marginalize qualitative investment judgment. As we now know, econometric risk-modelling failed when it was most needed. Henry Kaufman, ‘Prepare for Change on Wall Street‘, Financial Times, 2 June 2010.