It is vital for banks to acknowledge that they carry a share of the blame for recent events, says the former Citigroup Chairman, but it is not nearly as clear-cut as some commentators maintain.
The communications environment in which banks will wish to seek to restore their reputations – individually and collectively – has never been more difficult. On the one hand, we have a relentless, 24/7 global media, as part of which online “bloggers” pedal views and rumors that can be transmitted to mainstream audiences at the touch of a button. With 200m customers around the world, all of whom have friends and most of whom now have a new way of making themselves heard, that is especially challenging. Anything that a single disgruntled person says about a business can quickly gain wide currency.
Another communications issue is that financial journalism, having moved from its own sections to the front pages of many newspapers, has grown more voyeuristic. It is no longer merely about which companies are doing well and which ones are doing badly: it is about company A’s chief executive going through a divorce or some other aspect of his private life invaded. Quite apart from the personal pain this inflicts, it can be damaging to an industry’s broader image. What is being said may be a temporary consequence of the low regard in which financial businesses are currently held, or it may be a more permanent feature of the landscape. Let us hope it is the former rather than the latter.
The events of last year unfolded with a breathtaking speed that no one fully foresaw. Had you asked me at the beginning of 2008 whether we would enter 2009 with the US Government potentially owning 10 per cent of our business, and with 75,000 fewer employees than 12 months previously, I would have been skeptical as would most others. We knew the possibility (though not the probability) existed that there would be further losses to come, but our senior management team felt, as did the industry, it had a good handle on the situation.
It is vital for banks to acknowledge that they carry a share of the blame for recent events – but it is not nearly as clear-cut as some commentators maintain. It would be different if the rest of the world really had known what was going to happen, or if bankers had hidden their heads in the sand. It is important that executives do admit to some responsibility – and some are. A number of individuals, myself included, feel remorse and have publicly said so. Others are losing their jobs as part of management reorganizations.
Trust will be further restored when the issue of bonuses is fully addressed – but you are already seeing a healthy reaction from the banks themselves in this regard. A lot of people have not received any sort of bonus for 2008 – and others had them much reduced. In normal times that would naturally be difficult for individual institutions: the main consequence of paying people less, after all, is that your competitors rush in and hire them. These times are very different: what we are seeing now is a sea change in compensation practice across the whole sector in response to media pressures, public opinion and (above all) the market place. Ultimately, it is the shareholders who will insist on redressing the imbalance.
In the search for new models, banks will try to develop a compensation system that is less asymmetric than in the past. Profits increased over the years, but so did the risks – and that wasn’t always factored in as people walked away with rewards for transacting business that subsequently proved to be loss making.
Regulators and governments also have a view on pay – and will be able to impose it. Those of us who have accepted public sector support in the US will have to submit our compensation plans for our senior people to the government.
I also believe that people will look slightly differently at banks in the future – as the business model starts to change. Earnings per share will fall because of the number of new shares issued to governments and other shareholders. And most banks will have a much higher proportion of their earnings coming from what one might term traditional banking – facilitating trade, lending directly to companies – than from activities like securities dealing and proprietary trading that have fueled profits in the more recent past. These traditional activities may have smaller margins but there will be reputational advantage to be gained by those who demonstrate that they have learned to rebalance their businesses themselves, rather than being pushed into it reluctantly by legislators and regulators.
In the meantime, however, banks face new reputational risks – and the danger of renewed loss of trust – as they unwind the excessive leverage on which the current financial crisis was built. Bank customers (notably small and medium sized enterprises) may legitimately ask relationship managers at their banks why credit lines have been cut by 20 to 30 per cent – is it really their fault that they are less creditworthy than they were a year ago? Governments as much as customers are anxious that credit continues to flow – but what are banks supposed to do when not only regulators expect them to hold more capital but shareholders and the market place impose even greater demands? A “well capitalized” bank is now seen by the market place to have a Tier One ratio of nine per cent, as opposed to the regulatory minimum of six per cent.
Banks can cut costs and raise new capital to boost these ratios – but they also improve them if they reduce the quantity of assets on their balance sheets. There are many ways of doing this, for example by disposing of non-core businesses. However, organic reduction of assets, if adopted on an industry wide basis, could potentially starve borrowers of much needed funding, thereby exacerbating the downturn.
The management of the banks’ capital therefore has wider implications for the economy. There’s no easy solution but I believe it will take some period of bank profitability – without large mark to market write-offs, in other words – for the uncertainty to be dispelled and for demands for increased capital levels to abate.
In the early 1990s recession, the relationship between banks, small businesses and society at large (notably via housing repossessions) was badly scarred. Since then, politicians and the population at large – many who might previously have been instinctively hostile to banks – grew to understand the essential role that lenders play in wealth creation. It is critical that this confidence – clearly undermined by the events of the last few months – is restored quickly. It is also critical that governments do not try to win easy popularity for themselves, either by forcing banks to lend where it is imprudent to do so, or through permanent nationalization.
I do not think governments will make that mistake, though they might seek to encourage consolidation in some territories. The experience of Sweden – when the Swedish state (on behalf of the taxpayer) did take over parts of the banking system in 1992, but subsequently benefited when the government sold out – is a recent precedent that I hope will not be unique.
Sir Win Bischoff has had a long career in financial services, serving as Chairman of Schroders before the investment banking business was acquired by a Citigroup predecessor company. Appointed Chairman of Citi in December 2007, he handed over that role to Richard D Parsons in February 2009 and has announced that he will retire from the bank later this year.