Ask Boomer Banker will address specific questions sent to me at david@boomerbanker.com. Questions can also be submitted via LinkedIn if you are connected with me. All questions are welcome and I look forward to hearing from you.
1 May 2020
Dear Boomer Banker,
I follow your posts with great interest. After being European based, I now live in Singapore which gives me an Asian perspective. What I see is that European and US banks are missing out big time. Asia is miles ahead on digitisation, innovation and speed for banking services. Why do you think European and US banks are lagging behind?
Regards,
Eastern Innovation
Dear Eastern Innovation,
You have raised a very good point that I have frequently seen in my banking career. Banks outside of Europe and the US are quite often leading innovators in many aspects of banking. But why are the larger European and US banks often laggards in innovation. I believe there are three reasons as bankers are:
Too busy
Bankers like everyone have multiple demands on their time during their work day. The ability to find time to look for and implement innovation is very limited. Furthermore, innovation is often even more time consuming, especially if it is not nearby.
Too lazy
In addition to being busy, many bankers are a bit lazy in looking for new innovation. They are generally satisfied with how their clients are being served. Innovation requires enormous efforts with an uncertain return – so why spend the time. Especially given the barriers to change that exist in most banks.
Too arrogant
Finally, many bankers in the developed world tend to be arrogant and look down on other parts of the world considered less developed. They can not imagine that interesting innovations would arise in lesser developed economies. Whereas the truth is often just the opposite as innovation is needed to operate efficiently in more challenging environments.
So my advice to bankers seeking to innovate to better meet client needs: Look in unexpected places for real sources of innovation.
Best regards,
Boomer Banker
11 March 2020
Dear Boomer Banker,
It seems to me there is a groundswell of opinion favoring banks pursuing a strategy aligned with deliveringmeaningful financial and social returns. Yet, the pace of change in this direction is limited, perhaps in part due to a portfolio base where some existing assets have 5+ year maturities but limited ESG returns. It seems the Principles of Responsible Banking provide a basis for change. But being a millenial I have to ask:
- Could the transition process for banks be faster?
- And how can values-based banks deliver banking services at a scale that can compete with the largest banks globally and regionally?
Regards,
Impatient Millennial
Dear Impatient Millennial,
Accelerating the pace of change among banks to being more focused on delivering social, economic and environmental returns next to financial returns to investors is the key challenge to developing a values-based banking system.
You have correctly identified one of the major factors –time needed for existing loans or investments to mature and be replaced by ones delivering more social, economic and environmental value. This issue can be seen in the announcements from banks seeking to reduce their commitment to the carbon economy. These banks generally carve out exceptions not only for their current portfolios but also to provide transition time for their current clients. Clearly not an example of urgency.
I believe that historic portfolios are just a small part of the problem. To use an unfortunate but accurate analogy, banks are like oil tankers – very slow to change course given the inertia of the tanker. Critical to the change needed is a substantial shift in internal culture to encourage bankers to incorporate ESG principles in their daily decisions: what clients to target, what loans or investments to approve, and so forth.
As you noted the Principles of Responsible Banking are a solid basis for making change happen. The endorsement of those principles by many large banks is critical. But the key will be to ensure that the principles are embedded in a bank’s daily work and culture and transparent reporting on the results of embedding those principles. Millennials concerned about these issues need to ensure that banks deliver through their roles as depositors, investors, co-workers and participants in democratic processes.
Your second issue deals with scale. I believe it is unlikely that existing values-based banks will be able to develop sufficient scale to compete with the largest banks in the world. Historically banks that grow too fast (e.g. develop scale), inevitably run into asset quality challenges. So although the growth of values-based banks on a prudent basis should be encouraged, the ultimate source of scale in the banking system focused on ESG issues will require substantial changes in behaviors of existing larger banks. The Principles of Responsible Banking are a critical initiative to do so.
Best regards,
Boomer Banker
25 February 2020
Dear Boomer Banker,
What you think would be solutions outside of government intervention to some of the issues you’ve written about?
Regards,
Looking for Change in the Banking System
Dear Looking for Change,
This is a great question as so many people start with the belief or assumption that new laws or regulations will be the driving force behind making the financial system more responsive to meeting the needs of society from an environmental, economic or social perspective. Whilst I believe governmental and regulatory intervention can be helpful and is sometimes necessary, I do not believe it can successfully drive the needed change in behaviours in banks.
The core solutions will come from culture change within banks. Unless bankers see their primary purpose as serving society, they will not take the needed actions to shift banks to new business models. Cultural change is very challenging and will require efforts on many fronts.
I believe banking cultures will change from increased recognition that banks focused on solid environmental, social and governance (ESG) principles deliver more value for shareholders as a by-product as shown in the recent study commissioned by the Global Alliance for Banking on Values, the European Investment Bank and Deloitte.
Furthermore, there is an increased focus on risks banks face from environmental change or from companies not adjusting their business models to environmental change. Finally clients and co-workers increasingly look at the ESG profile of a bank when making their choices for their banking business or their employer.
Therefore, the study and these related factors will encourage cultural change as:
- Banks seeking to improve their financial performance can no longer use the excuse that strong ESG performance comes at the cost of reduced financial performance
- Investors seeking to provide financial returns will focus on moving their funds to banks with better ESG performance leading to better financial returns for investors
- Regulators seeking a safe and sound financial system can use the study and concerns about environmental risks to encourage changes in bank behaviours
- Clients seeking a banking partner sharing their values will move their business to those banks delivering ESG results
- Co-workers seeking a positive working experience will opt for banks sharing their values
A critical missing element for supporting cultural change is improved standardisation on reporting of ESG results. This issue needs further attention but it is clearly an important element for a variety of rating agencies and investors.The efforts of UNEP FI in developing and implementing the Principles of Responsible Banking should help in this area as well.
Best regards,
Boomer Banker