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Why a lack of management in banking makes another financial crisis 'almost inevitable'

Banking has not fundamentally changed since the crisis.
- Christian Dinesen
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Christian Dinesen, a member of the Department of Economic History’s Advisory Board, returned to study mid-career at LSE after 28 years working in European insurance and capital markets.

Insights from his career and his experience at LSE became the foundation for a new book which studies management practices in the financial sector; in this interview Dinesen explains why a lack of management is an enduring problem for the banking industry, and makes another financial crisis very likely.

In 2007, when the subprime mortgage market crisis hit the United States, Christian Dinesen was working as a Managing Director at Merrill Lynch. As the economic contagion quickly spread across the world's financial markets, triggering sovereign debt crises and bank bailouts, Dinesen’s own employer lost $52 billion.

Dinesen says: “The financial crisis was a moment when I felt I had to understand what had happened to my industry. Having been a management consultant for ten years prior to joining the bank, I was still unable to comprehend how the sector could be so poorly managed.”

After initial research into management in banking, Dinesen posed himself a controversial question; what if the financial crisis happened because banks weren’t being managed at all?

While still working full time, he was accepted to do a part-time Master’s in Economic History in 2010. His dissertation investigated management practices and eventually grew into his book, Absent Management in Banking, haw banks fail and cause financial crisis.

The book charts the history of the banking industry, beginning with the Medici, an Italian banking and political dynasty that dates in the Republic of Florence in the early 15th century. Drawing on multiple examples such as the rise and fall of the Rothschild family business, the collapse of Barings bank in 1995, and the Lehman Brothers bankruptcy in 2008, Dinesen builds a case for how absent rather than poor management has caused crises and recessions.

The long-term management deficit has been has deepened in the late 20th and since the start of the 21st century, exacerbated by the vast growth in the size and complexity of banks.

Dinesen says that management has often found itself secondary to the pursuit of profit for banking professionals, with bonuses a central component and overriding priority of their work: “Bankers are primarily bankers, even as they reach senior positions and add management responsibilities. This imbalance is inadequate for the international, highly complex financial organisations that we see today.”

Dinesen credits his tutors in LSE’s Economic History Department for cultivating his motivation to return to academic research, praising Dr Tim Leunig and Dr Olivier Accominotti in particular. He also had several valuable conversations with the celebrated historian Niall Ferguson, who was visiting LSE during Dinesen’s studies.

“Professor Ferguson suggested to me there was a gap in the literature for business school case studies, and encouraged me to take this approach due to my management consultancy background. He then invited me to Harvard to research these case studies and discuss my initial findings. This kind of opportunity could have only come from studying at LSE.”

Dinesen has now departed from his salaried position in banking, and works on research while continuing management consultancy, board positions and executive coaching. He says that his book has confirmed to him that his old industry is in urgent need for reform within.

“Banking has not fundamentally changed since the crisis, which is one of the reasons why scandals such as the London Whale in JPMorgan’s London operations, money laundering in Danske Bank’s Estonian branch, and Goldman Sachs’ problems in Malaysia have all happened since the crisis.

“In many ways, banks are even more complex since 2008. JPMorgan has increased in size while Goldman Sachs has added retail banking.”

The tightening of regulation that followed financial crises in the past often led to periods of relative stability. Since 2008, the separation of commercial and investment banks did not happen “in part due to the successful lobbying operation against the changes by banks”, says Dinesen.

“It is almost inevitable there will be another financial crisis. American corporate debt might be the trigger next time; many businesses are highly leveraged and have taken on large debts at low interest rates.”

Behind the article

Absent Management in Banking; How banks fail and cause financial crisis is published by Palgrave in February 2020.

Christian Dinesen will launch Absent Management in Banking at LSE on 6th May 2020. http://www.lse.ac.uk/Economic-History/Events/2019-20/Alumni-Lecture-2020