LBS/Accenture essay competition shortlisted

While the financial service industry’s reputation has been tarnished in recent years, it is not by chance that scandals have broken at the end of a “credit supercycle”; many industry failings can be attributed to the pace and scale of innovation in the twenty years ending with the 2007/8 crash. I conclude that if the industry fails to regain its reputation, in the long term we will see increasingly draconian regulation, illiquidity, and ultimately higher financing costs which will weaken growth in the real economy.

“When the tide goes out you find out who’s been swimming naked”

The fundamental social purpose of the financial services industry is to achieve an optimal allocation of capital and risk across the economy – essential factors in driving productivity growth and higher living standards. How can an industry that has unpinned such tremendous economic growth in the 20th Century become so vilified in the 21st?

The Libor scandal, Ponzi schemes, facilitation of money laundering, Swiss tax evasion, interest rate swaps, PPI, interns dying of exhaustion, the London Whale, the breaking of Iranian oil embargos, Repo 105, improper property foreclosures, improper use of customer accounts, Board‐level insider trading, subprime CDOs, golden goodbyes, an allegedly drug abusing bank chairman… there is no precedent for an industry sector facing such widespread criminal behaviour and corporate negligence allegations. However, I argue that tarnishing the entire industry is undeserved. Isolated criminal actions aside, the core reputational issue is the role of the banks and insurers in the US subprime crisis, the recessions that followed and the near bankruptcy of several Eurozone countries. In my view, society has to accept that these crises were an unfortunate price to be paid for innovation‐ innovation of financial products, currency zones and leverage structures. Mistakes were made but hindsight is powerful and we couldn’t learn from these mistakes without making them. Furthermore, it isn’t by chance that a boom in scandals has occurred at the end of an economic boom, as Buffet says, “When the tide goes out, you find out who’s been swimming naked”.

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