Thursday, 26 February 2009

The difference between banking and investment management with reference to Fred Goodwin and James Crosby

Alex Masterley has a great post on this subject, do go and read it. Here's an extract:
"Goodwin shares with James Crosby the distinction that both rose to the top of a large bank with very little experience of banking. And quite frankly it shows. Crosby came from investment management and operations whilst Goodwin came from accountancy and the BCCI workout, through Clydesdale banks operations. It may not be blindingly obvious bu the skills required for investment management and accounting are very different from those required for banking.


banking is very different from investment management. Investment managers hope that the very high returns from some of their positions will offset any of their losing positions. Bankers don’t have that luxury. There is very little upside in banking but a lot of downside. For every loan that goes unrepaid the bank needs the profit from 100 more to recover the loss. The decisions have to be very careful. The accountant can look at a company’s accounts and decide that a loan is likely to be repaid, but that view is a taken on the date the accounts are drawn up. If it goes bad ten days later based on some unexpected incident the auditor shrugs his shoulders. It wasn’t his job to consider. The banker on the other hand has to take a forward view and understand what lies behind the assets he holds, understanding the real probability of not being repaid and whether the earnings he makes from that asset justifies the risk."

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