Banks, knowledge and crisis: a case of knowledge and learning failure

Abstract

Purpose - Regulators such as Turner have identified excessive securitization, high leverage, extensive market trading and a bonus culture, as being major factors in bringing about the bank centred financial crisis of 2007‐2009. Whilst it is inevitable that banks adopt procyclical business strategies, not all banks took excessive risks and subsequently had to be rescued by taxpayers. The paper examines the extent to which individual bank outcomes can be attributed to systematic differences in banking knowledge concerning the primary risks and value drivers of their organisations by bank board directors and top management. Design/methodology/approach - The paper reviews a wide range of theoretical, historical and empirical literatures on banking models and detailed case analyses of failing and non‐failing banks. A framework for understanding the role and application of knowledge in banking is developed which suggests how banks, despite their pro‐cyclical business strategies, are able to institutionalise learning and actively create new knowledge through time to improve bank organisation, intermediation and risk management. Findings - The paper finds that a lack of basic knowledge of banking risks and value drivers by the boards and senior managers of the failing banks were implicated in the banking crisis. These knowledge problems concerned banks' understanding of their organisation, intermediation and risk management in an active market setting characterised by rapid economic and organisational change. Thus, the failing banks ignored or were unaware of this knowledge and hence experienced acute difficulties with learning the new knowledge needed to address the new problems thrown‐up by the financial crisis. Practical implications - The analysis suggests that addressing this knowledge gap via the institutionalisation of banking knowledge ought to constitute an important element of any sustainable solution to the problems currently being experienced by the banking sector. By ensuring greater bank learning, knowledge creation, and knowledge use, governments and regulators could help reduce individual bank risk and the likelihood of future crisis. Originality/value - In contrast to the claims made by some politicians and banking insiders, the analysis indicates that the banking crisis and its severity were neither unpredictable nor unavoidable since some banks, by institutionalising banking knowledge and history of past crises, successfully avoided the pitfalls experienced by the failing banks.

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