Author: David Korslund

In a Zoom meeting this week, one of the participants noted that her children had referred to the practice of blowing out candles on a birthday cake as being very unhygienic. Indeed this tradition that many of us have had for years is one which should disappear as we think about hygiene in a post-COVID-19 world. For children growing up today it is very unlikely that they will have parties with cakes and candles as in the past. This remark reminded me of a recent feature article in The Economist, “The 90% economy that lockdowns will leave behind.” This article begins to outline the many ways in which our world has permanently changed – much more dramatically than with the financial crisis of 2008.

For bankers the need to focus on a dramatically changing economy is critical and with much more serious consequences than the loss of the tradition of birthday cakes with candles. Many businesses will no longer be viable as the economy adjusts to more social distancing – a practice that will be driven as much by individual decisions as by governmental fiat. Many other businesses can survive but will need to invest in change to do so. And it is not just businesses with direct contact with people but also those with more indirect consequences such as energy firms where there may be a permanent reduction in demand – good for the climate but challenging in its transition.

Banks provide key support to companies in the real economy. Those banks that will be successful should be thinking about the changes that will be coming. These banks should be proactively looking for ways  to support their clients in the transition. The question for all bankers needs to be: What are you doing?

Today’s Financial Times covered an internal memo from Jamie Dimon to the staff of JP Morgan Chase. Dimon notes the need “for business and government to think, act and invest for the common good and confront the structural obstacles that have inhibited inclusive economic growth for years.” At the same time nearly 50% of his shareholders want JP Morgan to be more transparent in its reporting on environmental issues. Whilst Dimon’s memo noted he would be coming with more specific suggestions in the near future, I think it is fair to ask the question as to why those suggestions are not yet ready? And why are they not yet in implementation? Talk is very good but action makes for change.

At the same time what was JP Morgan’s record in supporting minority owned businesses in the recent crisis programs rolled out by the US government. As noted in the New York Times, there is a noticeable lower level of support for minority enterprises from these programs. One of the best ways to ensure inclusive economic growth is to support minority enterprises that provide jobs and income. Surely as with disclosures on environmental issues, JP Morgan can also provide insight into their efforts in these areas.

Finally although this post focuses on JP Morgan, the issues raised are relevant to all large banks. I applaud the support for inclusive economic growth provided by Dimon’s words, but it is the actions of his bank and other banks that will make the difference.

Jonathan Ford had an excellent column in the Financial Times this week. He correctly noted that the enormous increase in debt to finance the economy over the last several years makes it much less resilient for survival when times get tough. In particular he notes that this downturn “follows more than three decades of financial triumphalism. ” And indeed bankers are responsible for that “triumphalism” as many of them saw it as a way to increase profits and more importantly their personal bonuses.

However Ford throws in a remark on ESG goals that from my perspective has no relationship with the rest of his premise. He notes that now is the time “for pension funds to spend less time burnishing their ESG criteria and get back to basics.” Whilst I agree with the need for getting back to basics, I would argue that a proper and holistic focus on ESG is precisely the way for investors and bankers to support a healthy real economy that is not over reliant on debt.

Whilst there can be proper reasons to be critical of ESG approaches, they have nothing to do with the overall increase in borrowings. So it is not necessary to mix the apples of ESG with the pears of an over leveraged economy.

I received a question from a reader regarding innovation in banking. The question and answer are available on the Ask Boomer Banker page.

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?