40 Years of Turbulence: From The End of Bretton Woods to The Global Financial Crisis |

40 Years of Turbulence: From The End of Bretton Woods to The Global Financial Crisis

The immediate decades after World War II are now viewed as an era of stability for the banking industry, bookended by the signing of the Bretton Woods agreement in 1944 and its dissolution in the 1970s. Offering a historical perspective on the sector’s transformation since Bretton Woods, Dr Hugo Banziger, managing partner of Lombard Odier Group, examined the key drivers of change that have led to increasing financial turbulence in the last 40 years. In his lecture on September 16, moderated by Professor Ramkishen S. Rajan of the Lee Kuan Yew School of Public Policy, Dr Banziger also discussed why banks around the world failed to prevent the global financial crisis in 2007 despite risk management measures.

Why Bretton Woods worked

The Bretton Woods agreement, signed by 44 countries, was driven by a collective desire to avoid a repetition of the economic crisis that had inadvertently contributed to World War II. The countries agreed to a regulated system of fixed exchange rates, with all currencies pegged to the US dollar, which was in turn pegged to the gold standard. International financial institutions like the World Bank and the International Monetary Fund were established.

At the same time, many European and Asian nations had to rebuild their banks from the ruins of the world war. Thus up to 1973, the banking business model was simple, stable and highly regulated – very different from the system today, said Dr Banziger. Banks were national and had few other assets besides loans and cross-shareholdings. There was no exchange rate risk and a very low level of initial public offerings (IPOs) and bond offerings. “What we had was absolute certainty,” he said.

The transformation of the banking sector

However, the system did not remain simple or stable for long. In the United States, the Johnson administration massively expanded state spending and escalated its involvement in the Vietnam War, driving up inflation and incurring huge deficits. Instability crept into the system as banks started offering bonds abroad and nations abolished capital controls and allowed their currencies to float freely. The oil price shock in 1973 also drove up the prices of oil, creating a large flow of liquidity to less developed countries and a marked increase in syndicate lending.

Dr Banziger also stressed the impact of technology on international finance. In 1959, IBM opened its first computer service centre. While the services were as simple as spreadsheets to calculate the price of swops, the effect of such technology – along with the later proliferation of computers and mobile phones – was tremendous. People could now trade instantaneously in markets that were never linked before.

Technology thus drove the rapid globalisation and consolidation of banks. But the system failed to account for two crucial points, said Dr Banziger. First, regulation was not coordinated before the great financial crisis of 2007, creating a “vulnerable space” in international finance. Secondly, as Dr Banziger stressed repeatedly, bank managers in recent decades grew up in the post-war era of stability. They were thus unprepared when “basically everything changed” with the massive deregulation and volatility in the banking sector after the 1970s and 1980s.

Financial crises and lessons for the future

Drawing on past financial crises, Dr Banziger highlighted some unintended consequences and weaknesses of current risk management methods. The derivatives revolution created the illusion that “everything is tradable” while increasing banks’ international exposure. Reliance on value-at-risk and fair value accounting methods has also created problems, said Dr Banziger. Value-at-risk, which calculates the probability of loss in a portfolio at a given confidence level, works well for liquid markets but not in “cliff events” like a meltdown. Fair value accounting, which estimates assets and liabilities at current value, has since been criticised for not taking into account historical cost and market liquidity.

These problems came to a head in the global financial crisis of 2007. However, the biggest problem the crisis revealed was that the banking system had become so complex that managers and bankers themselves didn’t understand it, said Dr Banziger. “As a society, we cannot have a banking system that is dominated by mystery,” he said.

He called for financial systems to be simplified such that ordinary citizens and politicians can understand them, even suggesting that newly-appointed bank executives should undergo strict tests to ensure they know what they are doing. Other areas to address are how to protect citizens’ safety nets such as life insurance and pension plans; how to properly represent values and risk; and how to simplify corporate governance. While regulatory boards are now in an “excellent position” after learning a lesson from 2007, Dr Banziger said the problem is that the next big crisis may come decades later, when people no longer remember the reasons for regulatory measures. The system must be able to cope, he said. “Corporate memory may not exist anymore, so the market has to do it.”

On 16 September 2014, Dr Hugo Banziger, managing partner of Lombard Odier Group, gave a talk titled “40 Years of Turbulence: From The End of Bretton Woods to The Global Financial Crisis”at the Lee Kuan Yew School of Public Policy. Dr Banziger worked at Deutsche Bank from 1996 to 2012, where he served as Chief Risk Officer on the bank’s management board. He was appointed chairman of the board of directors of Eurex Group in August 2012. He also co-chairs the the Enhanced Disclosure Task Force of the Financial Stability Board. Dr Banziger chaired the Advisory Panel to the Committee of European Banking Supervisors from 2007 to 2010, and was a Member of the EU’s High Level Expert Group on Structural Reforms in the Banking Sector (Liikanen Group). He was appointed chairman of the Assembly of the International Red Cross Committee (ICRC)’s Audit Committee in 2014. Dr Banziger is also a visiting professor at the London School of Economics. 


In 1944, representatives of 44 countries gathered in Bretton Woods to set up a new international monetary and ­financial order. The US, Western Europe and East Asia entered into a period of economic prosperity, the Golden Age of Capitalism, that lasted 30 years until the Bretton Woods system collapsed in 1971. The end of Bretton Woods has been followed by a long period of instability with banking crises succeeding each other around the world and culminated in the Global Financial Crisis that started in 2007, reviving memories of the Great Depression of the 1930s.

The talk will focus on the forces which undid Bretton Woods, and the evolution of business models underlying the ­financial turbulences of the following 40 years, and the genesis of Risk Management and Corporate Governance which failed to save the world from the Global Financial Crisis. It will map the milestones of the most recent economic recession, its key drivers and the lessons that still have to be learned from the financial history of the 20th and the 21st centuries. Mr Banziger will also point out the weaknesses of the current fi­nancial system that may undermine the way to recovery.


Dr Hugo Bänziger, Managing Partner of Lombard Odier Group

Tuesday, 16 September 2014
5:15 p.m. - 6:30 p.m.

Seminar Room 3-5,
Manasseh Meyer,
Lee Kuan Yew School of Public Policy,
469C Bukit Timah Road,
Singapore 259772

Seats are limited and will be available on a first-come, first-served basis. Kindly register your interest in attending online.

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