Author: David Korslund

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.

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?

As we face the need for urgency in addressing climate change, new ideas are beginning to surface.  The CEO of Volkswagen noted in the Financial Times this week that they are looking for “a young climate campaigner to “aggressively” challenge the company’s environmental policies.” This new hire will be able to directly be in touch with the senior management. In the same article Siemens noted they are also looking for an internal champion for environmental issues for their Supervisory Board.

This suggests another positive step banks can take to deliver impact in addressing the climate change issue. Large bureaucratic organisations (a better description of a bank is hard to imagine) often need to empower change agents with direct access to top management to create support for needed change.

• Are there banks ready and willing to meet that challenge?
• Are they ready to feel the pain?