Month: March 2020

With the focus on the corona virus my attention like many others has been elsewhere. But it remains important to stay in touch with what is happening in the banking world. In the weekend came an excellent opinion piece from Sheila Bair in the Financial Times. Ms. Bair was chair of the FDIC in the US and she has solid insight into the issues facing banks. She has long been a proponent of strong capital for banks and comes with a relatively sensible suggestion that banks halt dividend payouts and share buybacks during the time of economic stress arising from the impact of the corona virus. She goes further and suggests that now is also the time for a moratorium on discretionary bonuses. That is leading by example during a time of stress.

Clearly that leadership message is not shared by Goldman Sachs who just awarded their new CEO a total pay package for 2019 of $27.5 million as reported by Bloomberg. Many bankers wonder why their reputations have suffered over the last several years. Perhaps looking in the mirror at their compensation practices which seem to be disconnected from economic reality may help them understand the source of their bad reputations. Or maybe leading by example is not very important?

Sitting at home in Amsterdam with much of the country shut down to deal with the corona virus epidemic gives time to think. Looking at current markets and the impact of corona led to thoughts of butterflies, black swans and canaries. The butterfly effect is at the basis of chaos theory – not a bad theory to consider at this time. Chaos theory led me to me to black swans – which according to Forbes is what the markets are experiencing. But at the same time I thought about canaries used in mines to warn of lack of oxygen and the danger it posed to miners.

It is the canaries that have been signalling to me market challenges that existed before the corona virus emerged as a serious economic threat. It is those market challenges that may make the economic threats even more dangerous. It is not clear that governments and regulators understand what is happening in the markets so that they can effectively intervene. A canary warning first emerged in September with stress in the repo markets. The Bank of International Settlements reviewed this market disfunction and analysed its causes. But do they have the right analysis?

Recent events in the markets create for me more uncertain canary moments. On 13 March the Financial Times reported that the Federal Reserve was intervening in the markets to address disruptions in the US treasury securities. The Fed noted that this was related to the corona virus.  But the following day the Financial Times reported on disruptions in the mortgage backed securities markets quoting an analyst; “Liquidity in mortgage-backed securities market, which is usually the second-most liquid market in the world after Treasuries, is on par with, if not worse than, what we saw during the financial crisis.”

The ultimate impact of the corona virus on the economy is uncertain but it looks to me like there are substantial underlying risks of disruption in the market that may make the impact even more negative. Clearly a time of heightened risks on many fronts – financial as well as physical as the corona virus works it way around the world.

Wells Fargo has faced numerous challenges regarding their sales practices with clients. But perhaps the issue is not specifically with their sales efforts but rather a more general internal cultural issue that does not sufficiently value clients and transparency. As reported in the New York Times, the US House of Representative Financial Services Committee issued a report Wednesday that noted an individual at the Consumer Financial Protection Bureau, the regulator responsible for monitoring Wells Fargo, “privately offered reassurances to Wells Fargo’s chief executive at the time that there would be “political oversight” of its enforcement actions.”

The New York Times further noted: “The report said the agency had promised that the unresolved regulatory matters, such as an inquiry into the bank’s aggressive practice of closing customers’ accounts, would be settled in private, without further fines.” These private assurances have not remained private with this congressional investigation. 

That leaves for me the question as to why the individuals involved both at Wells Fargo and the CFPB thought it was a good idea not to have the sun shine on those actions that were not in the clients’ interests. And leads me to conclude that transparency for both banks and their regulators is a key element for ensuring that banks serve society.

Update: 9 March 2020:
Since I published this post the Wells Fargo story continues to develop. Slate had an extensive article highlighting the many times there have been regulatory issues. As noted in Slate: “Good Jobs First’s Violation Tracker lists 136 separate fines and penalties paid by the bank since 2000, totaling about $17.3 billion.” Not a small sum of money nor just a few violations. Furthermore today it was announced that two board members will resign.

The voices of the GABV CEOs in my prior post are unfortunately not a majority of bankers. But the risks which they discuss are real and will impact banking results and stability. The Financial Times highlighted the concerns of regulators regarding stranded assets in the energy sector that are focused on carbon. As noted in that article “the Financial Times’ Lex team concluded that meeting the terms of the UN’s Paris Agreement — to limit global warming to 2C — would leave 29 per cent of oil reserves stranded and wipe about $360bn from the value of the top 13 international oil companies by reserves.”

And pressure on large banks from investors will continue to grow. Share Action has filed a resolution for Barclays to try to force a more proactive approach to carbon based energy lending and investments. As noted by Share Action, this was necessary “(b)ecause banks are the laggards on climate action.”

When will all banks realise the need to take action to reduce their support for a carbon based economy?

The largest banks have been described as too big to FAIL for some time. And with limited personal and corporate consequences resulting from misbehaviour they have all been described as too big to JAIL. But is it is possible that they are too big to SAIL? Have the largest banks grown so large that they can no longer be managed effectively?

This concern is supported by two recent articles in the Financial Times. Last week there was an extensive article on the challenges facing banks, primarily European, in finding the next set of CEOs. This article implicitly suggests that there are very limited candidates to run the large banks.

And today was an article regarding the unhappiness of the UK regulators with Deutsche Bank’s ongoing failure to address a variety of compliance related issues. Deutsche Bank is not the only bank facing challenges on addressing compliance issues. Clearly large banks face a complexity issue in staying in line with regularity requirements in a variety of geographic locations in multiple business lines.

Whilst banks and CEOs see value in size and complexity, the challenge is whether banks can be effectively managed? Are there captains to sail these ships?