Month: April 2020

The implementation of the US program to support small businesses highlights challenges in the cultures and behaviours of banks. On the positive side there is the rapid support for small business clients by community and regional banks. As noted in an earlier post regarding Southern Bancorp, these banks continue to be leaders in how that program should be implemented. As noted in the Washington Post, Union Bank in Lincoln, Nebraska quickly got to work providing support to their clients. Like many similar banks, “(t)hey did this by planning round-the-clock, shifting hundreds of employees to the effort, and cranking out approvals as soon as the program opened, even as the government was still clarifying the rules.”

Contrast that approach with that of larger banks as reported in the New York Times. “(S)ome of the nation’s biggest banks, including JPMorgan Chase, Citibank and U.S. Bank, prioritized the applications of their wealthiest clients before turning to other loan seekers,” essentially providing a “concierge service” as noted in the article headline. And Key Bank provided lending to two real estate trusts focused on luxury projects as noted in another New York Times article.  As further noted in that article “Mr. Mnuchin, who said this week that the program was not intended to aid big companies that have access to capital, urged firms that received loans to return the money if they did not meet the eligibility requirements. If they did not, he said, the loan would not be forgiven and those firms could face ‘severe consequences.'” That of course leaves open the question as to why these large banks are not thinking through the reason for this program before they extended the credit.

I suspect that as we look back on the implementation of this program and more facts surface regarding its implementation, the behaviour of large banks and large corporations will not look positive. Whilst community and regional banks with their strong relationships with smaller businesses and the communities where they operate will shine in their performance.

The economic consequences of the COVID-19 pandemic are just beginning. But with more than 26 million Americans filing for unemployment (to date) and much of the European economy in lockdown, it is clear that there will be a substantial negative impact on the financial system. One of the sources of capital to support the banking system are contingent convertible obligations and additional tier one debt. In both cases debt instruments that are intended to be capital backstops if banks face solvency challenges.

Jonathan Ford in the Financial Times a bit over one week ago raised concerns about the real value of these forms of (quasi-)equity. He noted that “European watchdogs have generally failed to resolve failing institutions, even in “good” times and with non-systemic cases.” He further notes that much of the bank balance sheet is based on historical accounting which undoubtedly is not keeping up with the speed of deterioration in the real economy.

His concerns regarding the strength of the capital of the banking system should be heeded. We are in an unprecedented economic deterioration and the impact on banks will be substantial. Clever structures used by banks to avoid the challenge of building strong capital positions will not prevent the reality to come through as banks lose money. Just as with an invisible virus, the underlying weakness of bank capital can be devastating.

I have to admit that the behaviour of bankers can sometimes make me a bit crazy. The implementation of the current small business support program in the US has driven me to new levels of insanity. This program was intended to help small businesses meet their payrolls at a time that they may not be open for business due to precautionary measures taken to prevent the spread of COVID-19. This program focused on providing loans that could be forgiven over time providing not only a helpful support for small businesses facing temporary challenges but also their employees.

The implementation of this program by many of the largest banks however shows that as usual there is limited consideration for the true purpose of the program but only a focus on staying within the rules of the program whilst supporting large businesses that have alternatives for finance.  As reported in the New York Times, the behaviour of large banks has already led to lawsuits as it appears that they favoured larger customers over smaller customers.

Simultaneously several banks have taken funds provided to individuals for short term financial support to cover other outstanding obligations, in many cases to cover substantial fees charged by banks for overdrafts of accounts. These stories have been well covered in both the New York Times and the Washington Post. Whilst the funds being seized by the banks may cover amounts due to them or other bill collectors, I would think that the banks would consider the reputation risk of doing so. Especially as some of the amounts due to the bank may be resulting from abusive practices of the banks relative to fees charged to individual clients.

Both of these examples highlight the challenge for banks as they seek to rebuild their reputations. On the one hand large banks need to have standard policies and procedures to provide guidance to their staff in their daily work. On the other hand banks need to have a culture that focuses on meeting clients needs and supporting societal goals. I suspect that smaller regional and community banks are much better able to achieve that balance through their closer connections to clients and the communities in which they operate.

Again this week a major bank (Westpac this time) was in the news relative to money laundering and other compliance related issues. As noted in the Financial Times, the CEO Peter King ” said he was committed to fixing the processes that led to the breaches in money laundering compliance, including recruiting another 200 people in financial crime and compliance and ‘putting in place a clearer accountability regime that will speed up decision making.’” This particular breach related to money laundering related to child exploitation involving pedophiles. It resulted in a fine of Australian $900 million based on transactions totalling over Australian $11 billion occurring across six years.

As with other banks that have faced fines and sanctions related to money laundering, Westpac is focused on adding staff to address financial crime and compliance. However, is that the right approach? It is my opinion that banks need to focus primarily on their culture – building a culture where the individual bankers focus on proper and legitimate banking. I can not understand how Australian $11 billion in transactions were processed by individuals at Westpac without any thought as to the activities behind the movement of the money. If those individuals were supported by a culture focused on doing values-based banking as opposed to doing anything that makes money for the bank, I suspect these transactions would not have been processed. And Westpac would not be paying such a large fine.

Sgt. Friday in Dragnet (a popular US TV show from my youth) was famous for this remark as he investigated crimes. As we look at the role banks play in financing fossil fuels, it is a very helpful remark to keep in mind. A report released on 18 March 2020 does a very credible and detailed job in researching and providing the facts on the support for fossil fuels by the largest banks in the world. With many of you working from home, it is a good time to review these types of reports as you consider where your work and where you invest. Additional analytics are available at the Rainforest Action Network site.

Of particular interest is the data presented on pp. 8 to 10 of the report. The research estimates that since the signing of the Paris Accords, USD 2.7 trillion in financing has been provided by the 35 largest banks in the world for fossil fuels. Many of these banks have consistently published corporate social responsibility reports highlighting how wonderful they are. Of particular interest is the high level of financing provided by JP Morgan Chase whilst at the same time Jamie Dimon (Chair) has been vocal that businesses need to be responsible to society and not just to shareholders. Are those claims credible with this level of financing for fossil fuels? Is it time for the large banks to walk the talk?

The response of US banks to the economic challenges from the COVID-19 crisis show that being big does not mean being best. Whilst many community banks (see previous post) are actively finding ways to help their customers, the largest banks seem to be wrapped up in internal bureaucracy or using the crisis to resolve other regulatory challenges they face.

Bank of America seems to be restricting access to the relief program for small businesses to existing lending clients – as if being a deposit client does not make you a good client of a bank. This approach appears to be especially detrimental to black owned businesses as noted in a New York Times article. This result is one reason why future expansions of the relief program need to ensure access to credit for all small businesses and especially those minority owned.

On the other hand, Wells Fargo has seen the temporary challenge as an opportunity to lift regulatory restrictions resulting from its misbehaviour with clients in the past. Wells faces a limit on its growth and successfully requested permission from the Federal Reserve to not be subject to that limit during the crisis. However, as noted in a Financial Times article, Sherrod Brown (Democratic Senator from Ohio) correctly stated: “If the Fed wants Wells to focus on community lending, and if Wells is truly committed to its communities and customers, the bank could instead have given up other risky lines of business in order to serve small businesses.” But of course Wells Fargo was unwilling to make that choice.

So once again in a time of crisis, the largest banks in the US are looking out for themselves and not their clients or society.

With the rollout of the financial rescue plans in the US, many banks have struggled with getting started. My good friend and colleague, Darrin Williams – CEO of Southern Bancorp, describes in this Fox News interview how the folks at Southern are just doing it!! Many of the largest banks have been much slower to get started as they sort through their internal processes. This is another reason that community banks are an important part of the overall banking universe – they have the flexibility and nimbleness to solve problems.

At a time of great and appropriate concern over COVID-19, it is critical to remain vigilant about the long term climate crisis we also face. In spite of negative actions coming out of the US relative to car fuel efficiency, it is heartening to see that Barclays will now be targeting net zero carbon emission. As reported in the Financial Times, “Barclays’ board will put the 2050 carbon emissions “ambition” to a vote at its annual meeting on May 7.” One could (and should) take the view that 2050 is not a very ambitious target but shareholders and other Barclays stakeholders can now ask why it needs to take so long to achieve a commitment they have made. Undoubtedly some of the change comes in part from increased investor pressure including from BlackRock which is becoming more aggressive in this area. The path forward is challenging but it is great to see some small rays of sunshine.