1Copyright © 2011 Oliver Wyman
John Banks was woken by his phone at 3am on Sunday, April 26, 2015. John worked for Garland Brothers, a formerly British bank that hadrelocated its headquarters to Singapore in late 2011 as a result of whatGarland’s CEO had described as “irreconcilable differences” betweenthe bank and the UK regulators. The last three years had been themost exciting of John’s life. Having led the bank’s aggressive expansioninto emerging markets wholesale activities, he had recently beenpromoted to its executive committee. John picked up the phone. It was the bank’s legal counsel, PeterThompson, calling. He had dramatic news. Garland Brothers, one of the world’s oldest banks, would declare bankruptcy tomorrow. As helay there in his spacious air-conditioned bedroom, unable to return tosleep, John tried to reconstruct the events of the last four years.
Planting the seeds of failure
At the beginning of 2011, the global economy was showing signs of finding a “new normal”. With the exception of a few smaller troubledeconomies, the world had returned to positive growth, and Westernstock markets had returned to their levels prior to the Lehmancrisis. Banks had started lending to each other again, becominggradually less reliant on central bank funding. Insurers had rebuilttheir capital positions back to pre-crisis levels. Ireland had joinedGreece in the list of peripheral Euro countries requiring a bailout, butthere was a general sense that the broader contagion problems hadbeen contained.New bank (Basel III) and insurance (Solvency II, in Europe) regulatoryregimes had been introduced and were designed to avoid a repeat of the sub-prime crisis. Banks were phasing in the new tougher controlsaround capital, liquidity and leverage, albeit over a relatively relaxedtimeframe. The Basel Committee’s impact study had estimated thatthe largest banks needed to raise a total of €577 BN to meet the newstandards, and several banks came to market in 2011 with multi-billion Euro rights issues.Beneath this relatively calm surface, however, trouble was brewing.Stakeholders in financial services firms wanted lower risk, butshareholders were still demanding high returns. Executives felt theirinstitutions were holding more capital than they needed, and theywere struggling to find investment opportunities that satisfied theirshareholders’ return requirements. Despite attempts by central banksto inject liquidity into the system, loan growth in Western economieshad ground to a halt as consumers continued to deleverage andcompanies remained reluctant to invest, uncertain of the futureinterest rate, tax and regulatory environment.