The financial crisis has left the banking industry with an image problem that isn’t going to disappear anytime soon, Morgan Stanley chairman and CEO James Gorman said. “The only group less popular than bankers this year is Congress,” Gorman told students at the Yale School of Management.
Speaking as part of the Leaders Forum lecture series on January 29, Gorman called the banking crisis that began in 2008 an “embarrassing” industry failure. “We’re still very much living with it,” he said. Over-leveraged institutions with risky assets and low liquid reserves fueled the situation, Gorman said, and because consumers lost confidence in the system, the crisis left every bank vulnerable.
“It was a crisis of liquidity, a good old-fashioned bank run,” he said. “That’s why no financial institution was safe.” Gorman called the federal government’s decision to loan the banks capital “one of the most courageous decisions ever.” The government’s insistence that all banks take funding—even those not acutely distressed—was key to helping restore consumer confidence, Gorman said, as it sent the message that the government was saving the entire system, not just individual banks.
“All those banks paid their money back with interest,” Gorman said, adding that Morgan Stanley repaid at a 21% interest rate.
The financial crisis necessitated a strong federal response, he said. Tighter regulatory requirements now require banks to hold more capital and liquid assets and to be less leveraged. Each bank must also have a detailed “resolution plan” demonstrating exactly how the institution would unwind itself in an orderly manner if forced to by another crisis, Gorman said. Banks must also now undergo an annual “capital adequacy review” by the Federal Reserve, a sort of financial “health checkup,” Gorman said.
In the wake of the crisis, Gorman said, the most important thing boards of directors at banks can do is make sure that they fully understand the complexity of the bank’s business dealings. Bank executives, meanwhile, need to make sure their firms’ actions will benefit consumers and the larger society, as well as the bank. “Management needs to recognize that we all occupy the same ecosystem,” Gorman said. “As a CEO, your most important job is to recognize and avoid catastrophic risk.”