IE Focus | By Francisco Lopez-Lubian, Professor at IE Business School

We will not start to pull out of the current crisis until investors regain their confidence in banks. That means restructuring not just assets, but also senior management.

The other day I was talking to a friend who knows I teach finance, and he asked me what I really thought about the current financial crisis and when it would be over. I asked him which kind of answer he preferred – the long or the short version.

My comments below are actually an attempt to provide something in between the two. Here goes:

  1. The liquidity problem facing finance entities, particularly in Spain, is a result of a lack of confidence in the solvency of said entities. This lack of confidence is more than justified, given that ever since the situation arose half way through last year, all the agents who have made announcements and promises related to cleaning up affected assets have systematically failed to deliver.
  2. In order for the finance system to start working again it is essential that confidence be restored, starting with the Spanish market. The technical solution that is set to be applied – the EU’s plan to recapitalize banks, is not guaranteed to reactivate the system, unless plans are drawn up to overhaul (or eliminate in some cases) the banks that partake in the bailout. The lack of coordination among the governments of EU countries is not helping to build the level of confidence that is essential to reactivate Europe’s finance markets. Every time an action plan is announced the loose ends that need tying up always get in the way. For example, those little details regarding who is going to finance what, for what reason, and when…
  3. In any case, in order to maintain levels of confidence in the mid and long-term, it will be necessary to establish supervision mechanisms that prevent the same situation from arising again, or at least make it less likely to happen.
  4. Perhaps part of the solution should be to focus on demanding that the information these markets provide be more transparent, not just with regard to activities and real profit (economic, risk-adjusted) but also in terms of remuneration systems   for administrators, the value they provide and how much their intermediation services cost, etc.

We all know that this crisis will not begin to show signs of easing until investors regain their confidence in banks. In other words, they need to feel that the banks have been sufficiently rationalized, and be able to see that banks are being run by a professional and reliable management team with a plan of action to make them profitable.

I think we are all aware that the current times will go down in history. All this talk of crisis, recession and recovery reminds me of something Ronald Reagan said in 1980 said when he was running against Jimmy Carter for president: “A recession is when your neighbor loses his job. A depression is when you lose yours. And recovery is when Jimmy Carter loses his.”

It may be necessary for many “Carters” to lose their jobs before the things start to get back to normal.