Risk management, expectations and global finance: The case of Deutsche Bank 1970-1990

Alexander Nützenadel

No 36, Working Papers from German Research Foundation's Priority Programme 1859 "Experience and Expectation. Historical Foundations of Economic Behaviour", Humboldt University Berlin

Abstract: What impact do past experiences have on the expectation formation of banks? This article analyses the risk management of Germany's largest bank during the 1970 and 1980s. In this period, financial deregulation and globalization increased the likelihood of credit defaults and forced banks to implement new strategies of risk assessment. The Herstatt failure of 1974 triggered a series of new regulations, partly based on initiatives of the banks themselves. After the sovereign debt crisis of the 1980s, banks introduced a comprehensive strategy of country-risk assessment. They systematically professionalized their information resources and integrated risk and liability management. Economic forecasting was often based on historical data used for the classification and diversification of risks. However, learning from past experiences had limitations, as recent events were often overrated. This had the effect that the banks' country risk assessment focused mainly on developing countries while the industrial world was not included in the schemes. This might explain why many banks have continually underestimated the financial risks present in developed countries since the 1990s.

Keywords: Risk management; financial markets; banks; expectations; historical experience (search for similar items in EconPapers)
JEL-codes: F65 G15 G17 G32 N2 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-ban, nep-fmk, nep-his and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:pp1859:36

DOI: 10.18452/25580

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