Banks and FSA failed to learn from Equitable Life collapse

Equitable Life 440

Banks and the FSA could have acted to prevent the recent financial crisis if they had learned from the collapse of Equitable Life, a report has found.

A report, “Did anyone learn anything from the Equitable Life?”, has been published today to mark 250 years since the mutual insurer was first established.

King’s College London professor of contemporary history Richard Roberts looked at whether the factors that triggered the failure of Equitable were also present in the financial crisis of 2007 and 2008. The crisis led to the Government taking Northern Rock into temporary public ownership and acquiring stakes in Lloyds Banking Group, Royal Bank of Scotland and Bradford & Bingley.

Roberts notes although the Equitable collapse triggered reforms in the insurance sector, there was no read across to the banking industry.

In the report, Roberts says: “Many of the same factors that were seminal to the Equitable Life crisis were present in the bank failures of the 2007-2008 financial crisis.

“Inquiry after inquiry, report upon report, point to the same consistent fault lines: hubristic executives, weak board governance, risky business models, product complexity and opacity, and regulatory shortcomings.

“These factors were starkly evident in the Equitable crisis well before the financial crisis, and appear to be going on today.”

Roberts suggests a formal and continuous process should be developed to ensure crises are learned from, and says the new regulatory structures presents a good opportunity to “get this wired into the new regulators’ modus operandi”.

He draws parallels with the opaque nature of Equitable’s products and the complex structure of swaps and derivatives that hid the risks being held by banks ahead of the crisis.

Roberts also compares the criticism of Equitable’s “domineering” senior management with the arrogance of executives of RBS, Northern Rock and HBOS.

He says: “The foremost finding of this research is the absence of learning by bankers or bank regulators of lessons from the Equitable crisis. This leads to the proposition that, had such learning from Equitable taken place, the impact of the banking crisis would have been moderated with obvious benefits to taxpayers and the economy, not to mention the banks themselves.”