Do Banks Need To Become Boring (Again)?
Banks (and bankers) used to have the image of being staid, slow to change, dull, unadventurous, risk-averse and boring.... What happened?The way I see it, banks wanted to become interesting and tried to do so with mixed (and at times disastrous) results. David Lascelles in his book Other People's Money charts developments in the industry, but well before the current crunch. We see the rises and falls of individuals and institutions. Banks tried to modernise and get in touch with customers, as opposed to being the distant, lofty beings that they were. A "sales culture" came in, and this is where I think things changed.
At the altar of sales, prudence took second place to pragmatism. Shareholders and analysts expected exponential profit growth year on year, which had to be delivered or else... Fiduciary duty cowered in the face of bonus-driven sales targets. As costs were cut and operations and risk assessment were centralised in regional hubs, branch managers - once the source of true risk awareness and judgement - turned into the eunuchs of the harem. Someone in Head Office always knew better (a reason that I preferred to stay in the branches).
Instead of risk-management, the culture became risk-taking. This was exacerbated over the last 10 years by cheap credit, increased competition and ever-increasing shareholder activism demanding higher returns. Regulation (based on national boundaries and interests) was weak and again forced to back off in the face of all the "good news" coming out. In the end, something had to give. The situation now is remarkably similar to the circumstances (commercial banks taking too much risk with depositors' money) that brought the Glass-Steagall Act into being in 1933. Some would say that this was a natural result of the development of healthy, competitive financial service markets, but perhaps this should not be the case with what people hold dear - i.e. their savings!
What next? Do we return to a system of high risk/reward/returns (investment banking) vs low risk/reward/returns (commercial banking)? Or do we look to do a better job of regulating? If the latter, we need to see regulators cooperating on a global scale and putting national interests second. Given the results of the Doha Trade talks, is this likely? Equally, we need to see a return to fiduciary duty being taken seriously, even if it means lower returns.
The world needs to realise that things have changed since the last big recession (in the 70s?). Financial and non-financial markets are inextricably entwined and the concept of a "regional" or "sectoral" downturn looks obsolete.
When all is said and done, governments, regulators and senior management have fallen down drastically on the job of maintaining confidence in the banking system, and it is the consumer who will foot the bill over the next few years.
Labels: Financial
posted by William Martin @ 20:26
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