From Good to Bad Bankers

Bankers are administrators of other people’s money, and they are responsible both to their depositors and to other stakeholders.  Human nature being what it is, however, they sometimes fall prey to overweening ambition, coming to see themselves as the rightful beneficiaries of the moneys entrusted to them.  This can lead them to make poor lending decisions and engage in risky practices, eventually moving on to cosmetic accounting and the concealment of problems, speculation and even outright fraud.

Supervisors are there to prevent such behaviour, of course. They are responsible to government and the general public alike for the stability of the financial system, the proper allocation of financial resources by the banks and the protection of depositors and creditors.  Their responsibility is, then, subsidiary to that of the bankers themselves.

Where supervision is lax and ineffective, however, it encourages bad management by bankers, creating a vicious circle that eventually leads to financial crises, which has most often to be cured using tax-payers’ money. Of course, it also hurts the broader economy. That is why the inseparable trio of regulation, supervision and resolution must exist.

In this collection of his writings over a period of some 50 years, Aristóbulo de Juan describes the causes, characteristics and consequences of financial crises based on his own experience as a central banker, world bank expert and consultant spanning a career of more than 55 years.

In a nutshell, the papers brought together in this book recount circumstances that have always plagued banking, and that are only too likely to recur in the future.

“This book is an evergreen classic that will help bankers, regulators, and policymakers through the ages, because bank crises are inevitable. Aristobulo de Juan brings a wealth of experience from banker, regulator, academic, and analyst that has seen many cycles of crisis, restructuring, and revival, only to decay back into crisis. Written full of wit and wisdom, this book shows how good bankers can become bad bankers through micro- and macro-decisions that allow them to slip across financial discipline into covering up the losses. Aristóbulo’s Double Loss Rule is only one of the gems that can be found in this treasure trove of practical banking and regulation. This is a must-read for all aspiring bankers and regulators, if only to bring common sense and reality back from the fog of excessive technical jargon that plagues banking today.” (Andrew Sheng, Chief Adviser, China Banking and Insurance Regulatory Commission) 

“Aristóbulo de Juan is the master of bank failures. In his writings, through his teaching and advising and in his administrative roles, Aristóbulo has over the past 40 years taught us how to think conceptually about why commercial banks fail. He has delved deeply into the arcane behaviour of bankers to identify why banks get into trouble in the first instance, what examiners must do to discover concealed losses, what regulators must do to manage troubled banks, whether the problem is at an individual bank or, more likely, many banks leading to countrywide financial crisis. Aristóbulo has brought all of his wisdom together in this book to tell us what we need to do to avoid good bankers becoming bad bankers. One can only hope that the book will be widely read by bankers, by supervisors and by policy makers. Billions of public money is on the line.” (Millard Long, former Head of the Financial Sector area at the World Bank)

“In pithy and often colourful language, Aristobulo de Juan draws on his extensive high-level experience over the past half-century of bank failures both in Spain and well beyond, to pinpoint the behavioural quirks and ethical defects that lead to spirals of bank insolvency and resulting in ineffective half-measures in bank resolution. Wise words, and a most refreshing read.” (Patrick Honohan, former Governor, Bank of Ireland)

“Aristobulo de Juan was able to do something I thought was impossible... he clearly combines the micro and macro causes of the banking crisis. De Juan identifies human greed, concealing of business errors, and the inability of regulators and governments to take timely action as some of the main problems! Go through this book with a magnifying glass, it’s worth it!” (Mitja Gaspari, former Minister of Finance and former Governor of the Central Bank of Slovenia)

“Bank regulators, bankers, investors, students of banking and bank regulation, and anyone interested in finance: run, don’t walk, to get a copy of this book. With it, you get a seat at the table with one of the most experienced and wisest supervisors on the planet, and you get to learn some key lessons that will serve you well. The first chapter alone is worth the price and will help inoculate you against the ‘viruses’ that at times run rampant in the financial world.” (Jerry Caprio, William Brough Professor of Economics and Chair, Center for Development Economics, Williams College, USA)

“I have no hesitation in recommending Aristobulo's book From Good to Bad Bankers as mandatory reading for all regulators and supervisors anywhere in the world. The book is full of pearls of wisdom based on years of hands-on experience and problem solving in banking regulation and supervision. What is most remarkable about Aristóbulo is his unwavering belief that good supervision is the essence of regulation. His view that on-site intensive and if necessary intrusive supervision to evaluate the banks’ asset value is absolutely true and is something supervisors shouldfollow anywhere in the world.  In emerging economies like India, the book has great relevance and being based on practical experience, supervisors in these countries will find they can relate to it. The style is easy to read and understand and this is a big bonus for these countries.” (Usha Thorat, former Deputy Governor of the Reserve Bank of India, India)

Aristóbulo de Juan has dedicated more than fifty years of his life to banking, thirteen of them as a senior executive in retail banking and some forty more as a front line supervisor and consultant dealing with bank reform and financial crises on four continents. After his time in the private sector, he spent nine years in the orbit of the Bank of Spain, initially as the CEO of Fondo de Garantía de Depósitos, the Spanish deposit guarantee scheme, and then as Director General of Supervision at the central bank itself. In these positions he played a key role in the treatment and resolution of the Spanish banking crisis of the 1980s and in the modernization of Spain’s supervisory mechanisms.  He then went on to spend three years as a Financial Advisor to the World Bank in Washington, where he dealt with financial reform and crisis management in emerging economies.  In 1989 he set up his own consultancy firm specializing in problem banks and bank supervision. Inaddition to his advisory work, he has spoken at conferences and seminars in countless different forums, including the University of Oxford, Harvard, Yale and the Wharton Business School, and at the Federal Reserve, the Bank of England, the Bank of Russia, the People’s Bank of China and the Reserve Bank of India.  He is a member of the Advisory Board of the Spanish financial daily Expansión, and he has written numerous articles on the financial crisis of 2007. He also co-authored a book on the subject with Francisco Uría and Íñigo de Barrón, which was published in 2003 under the title Anatomía de una crisis.