Banking is in disgrace: time to end casino carelessness
OPINION: The Ulster Bank glitch is the latest reminder of ‘bankster’ ignominy, but Ireland can seize the opportunity for change
IF A bank cannot deliver its core purpose to its customers so they can can use it to receive and pay out money, it should lose its licence to operate.
There is no more serious business failure for a bank , bringing in its wake as it does vast economic and social consequences. It’s like a water company unable to supply water or a power company gas and electricity. Yet by the middle of this month up to 600,000 customers of Ulster Bank will have been in this position for four weeks – a calamity.
The now yawning gap between bank managements and their customers was once again revealed by the reaction of Ulster Bank chief executive Jim Brown to the Oireachtas committee this week inquiring into the affair. Brown said he would not refuse his bonus now but would decide only at the end of the year.
Later he issued a “clarification” for what even Ulster Bank recognised as a public relations disaster, explaining that because customer service and re-earning trust were a priority, he had decided to tell the bank’s board that “I do not wish to be considered for an annual bonus award for 2012”.
Should we cheer? We should weep.
Evidently the criteria for Brown’s annual bonus – and note that a long-term incentive plan on top of this bonus would be standard – mean it is set up as an entitlement. There can be no requirement that he should first perform all aspects of his job, like ensuring the bank delivers its basic service to customers, before any bonus is awarded: rather the bonus is a payout with the slenderest of performance criteria which the Ulster Bank board would have had to give Brown had he not volunteered to relinquish it.
We have had a telling glimpse into the amoral, venal world of contemporary banking in which service comes well behind personal remuneration – sanctioned by weak bank boards happily pocketing their own fees. When the hue and cry has died down, the array of long-term incentive plans and discretionary payments that will make a very rich man of Brown, an executive unable to ensure his bank delivers a basic utility service, will quietly kick in.
It was one more small milestone in the long migration of British and Irish banking from being industries that, however imperfectly they used to serve their customers and business communities, at least could be relied upon to be solid and deliver the utility dimension of banking.
No more. They have become instruments for the self-enrichment of those who work in them and who see their customers – from ordinary work-a-day men and women mis-sold absurdly complex financial products to the large institutions with whom they do business in the over-the-counter markets in opaque financial derivatives – as objects to be fleeced.
Hence the Libor scandal that has consumed Barclays and soon the other banks with whom Barclays colluded: hence mis-selling scandal after mis-selling scandal; hence Ulster Bank’s – along with NatWest and RBS of which it is part – inability to run a banking service; and above all the legacy in Britain and Ireland of a crushing mountain of private debt that should never have been lent.
Meanwhile, apart from Seán FitzPatrick and now Bob Diamond, there have been almost no casualties among those who created the mess.
Of course many of bank employees will be as appalled as the rest of us, and probably ashamed, by the behaviour of those at the top. But it is not a few bad apples. It has become systemic. The epicentre of the degeneration of banking is the emergence of investment banking as the super-profitable component of so-called universal banking, setting a gold standard for endemic conflicts of interest, systemic amoral behaviour and extreme avarice that has spread across banking.
The ideological dogma of free market economics – financial markets could only be efficient – became a rhetorical cloak allowing bank managements to break down the wise divisions created over decades between investment banking and normal banking, merge the two and use the vast balance sheets so created to become market-makers and position-takers in the new fangled markets for financial derivatives.
From small and useful beginnings – helping a bank hedge the risk of fluctuating interest and exchange rates for an individual business customer – derivatives have exploded into markets worth hundreds of trillions of dollars, more than 10 times world GDP. But there is no way that these instruments can insure against system-wide movements in prices as they purport to do.
Some bank has to lose by being the sucker paying out to others, then becoming the weak link in the system which, in an extreme case, has to be bailed out by the taxpayer.
Derivatives on the current scale should rather be seen as economically purposeless constructs – socially useless, as Adair Turner, chairman of Britain’s Financial Services Authority dubbed them – whose ease of manipulation in opaque markets make the investment banks rich as long as they have balance sheets large enough to take positions in which tiny price movements become magnified into billions of dollars of profit.
The investment banks’ capacity to do this is because as part of retail and commercial banks – with no separation or ring-fencing between them – they can take positions on a vast scale because a) they are enormous and b) their deposits are effectively guaranteed by the taxpayer – or in Ireland’s case, are full and legally guaranteed by the taxpayer.
Banks rig the benchmark interest rate, Libor. They control the markets in very opaque financial products. There is precious little oversight by managements or regulators. The temptations to game the system for self-enrichment are irresistible.
The rotten culture invading banking has spread from these dealing rooms setting the benchmark for the kind of returns that should be routinely expected not just in the sham business of investment banking, but for all banking. Footloose, institutional shareholder “tourists” with no interest in banks or their economic and social purpose have insisted that the 20 per cent or more real returns on capital in investment banking should be the norm for the industry.
Bonuses are set to incentivise the behaviours that will achieve such returns – by fair means or foul. Because such consistent returns are close to impossible by fair means, managements and senior executives are encouraged to collude in foul.
Now is a decisive moment for Irish and British banking. Even the Economist refers to “banksters”. Meanwhile, the economy acutely needs a financial system that backs wealth-generating innovation and entrepreneurialism. Ireland, modelling its banking system as a version of Britain’s, must think hard about what it wants its banks to do and how to achieve it. Banks should be a key part of Ireland’s innovation and investment ecosystem, not offshore casinos careless of their economic and social vocation.
A start has been made in Britain with the promised implementation of the Vickers Commission’s recommendations to ring-fence investment banking from commercial banking. The ring-fence should be strengthened to produce a de facto separation. In particular, trading desks should operate as fully separate units with their own boards, balance sheets and capital.
The measures should be rolled out as soon as they become law rather than delayed until 2019. Ireland, instead of vainly hoping that Dublin might gain by banks exporting their casino business , should follow suit.
That is only a start. Dublin has been promoted as a financial centre – code for an anything goes, extreme laissez-faire approach turning a blind eye to the character of business routed through Dublin branch offices. Ireland must make it clear it is ready to fall into line with global practice – or a bank is not welcome.
There is also the question of ownership. Shareholders exercised far too little influence over bank managements and were too hungry for fast money. The Ownership Commission (which I chaired) argued for the creation of new ownership mutuals that pool the voting rights of institutional shareholders. This would anchor ownership to set more reasonable profit expectations and give owners real muscle in a dialogue with managements. Ireland could give a lead.
In particular Ireland could take a lead on remuneration. In my Fair Pay Review for the British government I argued that private sector executives should put a proportion of their pay at risk to be earned back by doing their job properly; only then should they be eligible for an equivalent bonus.
Ireland should far more blame the behaviour of its banks for its current plight than the euro. It needs a financial system that will deliver growth and enterprise – and also works. There is no veto on action, except inside politicians’ minds. Time for the country to step out of Britain’s financial shadow, and do something brave and original.
Will Hutton is an economic journalist, principal of Hertford College Oxford and chair of the Big Innovation Centre