Op-Ed Contributors

Lesson is to go back to basics

By Xiao Gang (China Daily)
Updated: 2010-09-16 07:48

Unfortunately, however, relatively few people are now pondering the simplest principles of running a financial institution. Drawing on lessons learned during the crisis, it is extremely important to stress these basic principles.

Let's not forget the butterfly effect, meaning that big events can be caused by very small incidents. The global financial crisis stemmed from the US subprime practice. A massive amount of home mortgage loans went to individuals with lower credit scores and repayment capabilities, obviously not in compliance with the first basic line of defense for lending money.

I recall that Wang Qishan, Chinese vice-premier, once told some international veteran bankers in London City Hall: "You are our teachers, and you often taught us three principles, namely security, liquidity, profitability, as operational fundamentals of the financial industry, but why didn't you keep these in mind while doing business?".

Mistakes are usually made in common sense, even for the highly sophisticated.

In January 2008, there were 12 triple A-rated companies in the world, and 64,000 structured finance instruments, such as collateralized debt obligations, rated triple A.

As Lloyd Blankfein, chairman of Goldman Sachs, reflected on some of the lessons to be learned from the crisis in his article in the Financial Times: "It is easy and appropriate to blame the rating agencies for lapses in their credit judgments.

But the blame for the result is not theirs alone. Every financial institution that participated in the process was to accept its share of responsibility."

Bank of China, as the largest foreign currency business bank in China, teaches us another lesson. We suffered some subprime securities investment losses during the crisis because of lack of knowledge about those complex products. Nobody at that time could clearly explain what had happened to the products we purchased. We had erroneously relied upon external ratings of the products instead of our own capability of evaluation. The lesson we have learned from the losses is quite straightforward: don't do anything you don't fully understand.

Knowledge is valuable, so we need to focus on markets we know well, on customers we recognize deeply and on products we understand fully.