Bankers’ Rich Record of Nonlearning

The finance sector is especially rich in examples of experiential nonlearning, in particular in banking, where the record of failures has left a decent trail of evidence that successive generations of highly paid bankers continually forget. A graphic example, which illustrates both the magnitude of the phenomenon and its pervasive nature, can be seen in the banking crisis of the 1980s and 1990s. In the early 1980s the U.K. banking community was badly mauled by bad debts in South America. Less than 10 years later it was again overwhelmed—this time from loan defaults elsewhere in the developing world. Speaking in 1991, the head of one of the United Kingdom’s largest banks admitted that there were plenty of historical precedents on Latin American lending that “should have put the red light up for everyone” (Lord Alexander, 1991). He added, “We have got to ensure that the lessons of the recent past are not forgotten by the rising generation of bankers” (Lord Alexander). As he was talking the banks were once again making similar errors of judgement—this time at home—with High Street lenders having to chalk up further provisions collectively totalling almost £4 billion in their 1992 accounts. This prompted one analyst to comment that “the biggest worry is that banks do not seem to be capable of learning from their mistakes,” a warning echoed in 1994 by a banking industry think tank that analyzed the massive write-offs. For the current sub-prime and credit crunch problems, the official lessons to be learned still have to be assessed, but the odds are that the echo will be equally deafening.

Another example of how easily (and often) the opportunity to learn from experience is overlooked can be seen in the aftermath of the Barings bank collapse in the United Kingdom, when rogue trader Nick Leeson ran up £791 million of hidden losses while working for the company in Singapore. Less than a decade later, four traders at National Australia Bank lost AU$252 million (£100 million) in unauthorized foreign exchange trades. In 2002 another trader at Allied Irish bank managed to hide almost £700 million of investment losses before being found out. And more recently, an independent review at the petroleum company Shell found that company executives knowingly hid a massive shortfall in oil and gas reserves. Management and infrastructure flaws continue to allow such events to persist. The lessons of Barings had clearly not been learned, and with expensive consequences.