Author: David Korslund

On March 11 the Financial Times reported that HSBC was successful in securing investor support for HSBC’s plan to address climate change. By doing so HSBC was able to avoid a vote at its shareholders annual general meeting on a proposal to revamp its financing of coal and address other financing for companies and projects with a carbon intensive footprint. But HSBC is far from the worst among large banks relatieve to carbon footprint financing as detailed in a report issued by a coalition of NGOs focused on climate change. HSBC ended up ranked 11th in that report and was only with total lending on fossil fuels about a third of the amount lent by JP Morgan Chase – the largest lender with more than $300 billion lent over the time period covered.

This report used Bloomberg data to analyse 60 large banks and their financing of fossil fuels over the years since 2015 when the Paris Climate Accord was agreed. In that time more than $3.8 trillion was lent by these banks to support fossil fuels. Although there was a decline in 2020 relative to both 2019 and 2018, the amount lent was still greater than in 2015 and 2016. And consistently more than $700 billion was lend in every year since the Paris Climate Accord. What makes the report extremely valuable is the ability to sort the underlying data by a variety of criteria including each bank’s policies regarding fossil fuels. Furthermore there is a detailed description of the methodology used for the report that provides useful transparency.

In cooperation with RedMoney Seminars, I will be repeating a course on values-based banking in June. The course is two three hour sessions on 29 and 30 June starting at 10 am Singapore/7 am UK time. More information including how to register is available at this link.

The inability of parts of the US political system (e.g. the vast majority of the Republican Party) to rationally consider the impact of climate change is stunning, A recent article in The Washington Post cited a letter from members of the US Senate Finance Committee to Jerome Powell, Federal Reserve Chair, expressing their concern that the Federal Reserve should not focus on environmental concerns as it was beyond the remit of the Federal Reserve to do so. The letter states: “We urge you to refrain from taking any additional actions with respect to climate-related risks that would impose certain costs for uncertain benefits.”

But one of the key roles of the Federal Reserve is to look at systemic risk. Therefore it was of interest to see on the very same day of the letter in the US, a blog post from Luigi de Guindos of the European Central Bank that goes into detail on the risks facing the economy and hence the banking system from climate change. This post goes into detail on the approach used that leads to the conclusion that there is real systemic risk from climate change. Whilst the focus of the stress test was Europe, it is hard to believe that a similar stress test would have an alternative conclusion in the US.

Perhaps it is fine for the Republican members of the US Senate Finance Committee to want the Federal Reserve to bury its head in the sand regarding the risk of climate change. One can only hope that when those risks are realised, these same members will be happy to pay for the losses incurred by ignoring those risks. But of course those payments will not be from the individual senators but rather from US society as a whole.

Compensation for bankers, especially bonuses, are a never-ending story of unhappiness. Many of the bankers receiving large bonuses are always convinced that they did not receive enough. But investors, regulators and society are quite right to ask what are the returns they receive in return for handsome payments to individuals. The challenges were well captured in an article and Lex comment in the Financial Times on 12 March.

The article noted that for Deutsche Bank the total bonus pool of nearly €2 billion was more than 16 times the profit earned by the bank. Investors, and specifically Union Investment one of the largest German investors, are not receiving any dividend. The article goes on to note that whilst the senior executives agreed to forego one month salary as solidarity for those suffering from Covid-19, this “sacrifice” was more than offset by the high level of bonuses. Does the Deutsche Bank senior management really believe that this comparison will not be seen?

Of further note in the article was that Deutsche Bank wanted to pay even more in bonuses but was stopped by the European Central Bank. Of further interest was that of the top earners at Deutsche Bank (e.g. more than €1 million), more than 10% had left the bank and the amounts included severance payments. This sounds like a great way to reward failure rather than success.

Lex focused not only on Deutsche Bank but also on Credit Suisse where the comment also covered the impact of the ongoing Greensill scandal. Lex pointedly notes that senior Credit Suisse staff has been known to speak at the World Economic Forum in Davos on responsible leadership whilst implying that the actions of the same management relative to their own compensation calls into question their own responsible leadership. Lex goes on to note that there are very different views from within the banker bubble and outside that bubble in general society. Lex concludes: “Banking’s social contract is constantly rewritten. Paymasters should proceed warily.” Words of wisdom that I doubt will be followed.

As readers of this blog know, there is often a focus on compensation culture within banks. Or rather a focus on the apparent inconsequential compensation culture of many banks. A very good example of this issue came up in a store in 5 March 2021 Financial Times report on the compensation provided to their new CEO, Ralph Hamers. As readers may recall, Mr. Hamers was already a topic in this blog on 16 December for issues related to his work at ING Bank in The Netherlands.

It appears that UBS has decided to highly compensate Mr. Hamers for his work in the last quarter of 2021. The article noted that “Ralph Hamers has been paid SFr4.2m ($4.5m) for his first four months of work, more than his entire annual earnings during his time as the head of Dutch bank ING.” But what makes this payment most interesting is that Hamers began his role at UBS on 1 September 2021 and took over as CEO on 1 November – already one month into the 4th quarter for which he was handsomely paid. The article goes on to quote the UBS annual report: “Ralph Hamers decisively led UBS as group CEO through the fourth quarter and delivered very strong results, thereby successfully completing the year and contributing to achieving the best results for UBS in a decade.”

With all due respect to Hamers who has been a very good bank manager over many years, it seems a bit unusual that he is paid so highly for results in a quarter when he was only in charge for 2 months. Furthermore, one could ask how much impact his leadership or the leadership of any bank CEO has on earnings in a quarter where they are just beginning their role. Does the UBS Compensation Committee really believe that his efforts in 2 months were so significant that such a payout is justified? Or is this just another example of why cynicism regarding compensation of bankers is justified?

On 28 February in the Financial Times, Martin Sandhu writes about the need to “clean up global finance” citing two recent reports. He notes further that “(a)ccording to (one) report, the world’s governments lose more than half a trillion dollars annually to tax manoeuvres that circumvent the intentions of legislatures by exploiting loopholes and discrepancies in the law.” Clearly these are resources that are needed as governments seek to address economic consequences of the COVID-19 crisis.

The first report Sandhu cites is form a UN High-Level Panel on International Financial Accountability, Transparency and Integrity. Their report was issued on 25 February. In this report’s Executive Summary,  the key conclusions can be found in this paragraph: “Illicit financial flows (IFFs) — from tax abuse, cross-border corruption, and transnational financial crime — drain resources from sustainable development . They worsen inequalities, fuel instability, undermine governance, and damage public trust . Ultimately, they contribute to States not being able to fulfil their human rights obligations.”

Whilst not directly mentioning banks, specific comments are certainly directed towards the role of banks in the international financial flows:

• The global financial system must be reformed, redesigned and revitalised so that it conforms to four values – accountability, legitimacy, transparency, and fairness.
• Policies shaping the global financial system and furthering financial integrity must be redesigned to adhere to the values of accountability, legitimacy, transparency and fairness.
• Enablers should be held accountable to agreed standards; the media should be protected; and civil society should be included in policy-making.

The second report cited was issued by the Center for American Progress. It includes a preface endorsed key legislative leaders from the US, the UK and the EU:

• Sen. Robert Menendez, Chairman, U.S. Senate Foreign Relations Committee
• Tom Tugendhat MP, Chairman, U.K. Foreign Affairs Committee, and
• David McAllister MEP, Chairman, EU Parliament Committee on Foreign Affairs

The key conclusions can be found in this paragraph from the Executive Summary: “The emergence of kleptocracy as a threat to global democracy has occurred in tandem with the growth of poorly regulated and ungoverned spaces in the global financial sys- tem, which in turn has birthed a shadow economy that now contains immense flows of anonymous wealth. The rise of financial secrecy has enabled the “globalization” of corruption, empowering kleptocratic states and actors on the world stage by offering them new tools and access to foreign markets. This trend toward globalized corruption has been enabled in crucial part by regulatory asymmetries among key international economic actors and a lack of resources and political will in law enforcement.”

From both of these reports it is clear that the role of banks, especially large international banks, will and should be under scrutiny for their role in facilitating flows of funds of a dubious nature. As with KYC and AML regulations, banks will need to look at their practices and more importantly their cultures to ensure they are not contributing to a problem but rather are part of the solution.

Recently the Chicago City Council has taken to task the larger banks providing banking services for their lack of support for community lending in Chicago – especially for home mortgages. The efforts of the City Council were well detailed in a recent report by WBEZ, the Chicago public radio station. Whilst banks tend to be very liquid at the moment, the amount of money on deposit from the City of Chicago is still meaningful as it is around $500 million. In addition the city uses the banks for operational services for which it is likely that fees are also paid. But from the article it would appear that that banks prefer not to discuss the issue as they refused to attend the council hearings relative to their track record. They also did not provide comments to WBEZ for their report.

The action of the City Council was driven by a comprehensive report also developed by WBEZ in cooperation with the non-profit City News Bureau and released in June 2020. This report includes a particularly good graphic showing that the lending for home mortgages is highly concentrated in the wealthier neighbourhoods, which coincidentally (or not) are primarily White. Black and Latino neighbourhoods showed considerable lower levels of lending. In fact four primarily White neighbourhoods received more lending that all the Black and Latino neighbourhoods on a combined basis. Even if adjusted for housing price differentials, the actual number of loans tells a similar story by a ratio of 4 to 1.

For many in the US the path to basic wealth accumulation has gone through the route of home ownership. If there is no mortgage funding for acquiring homes, there can not be an effective growth of wealth for Black and Latin families. And so the wealth gap in the US based on ethnic background continues to be driven by choices made by banks. Perhaps the efforts of the Corporate Social Responsibility departments of these very large banks should focus their efforts on improving the lending approach of their banks instead of producing polished reports on all the good work their banks do. That change would lead to results that count in improving the lives and wealth of people of all backgrounds.

A recent Financial Times article regarding regulation of subprime lending to individuals in the US raised interesting thoughts that also apply to Microfinance lending. The core of the article covers the potential for predatory practices that subprime lenders in the US have used ensure that borrowers stay in debt and pay relatively high levels of interest rates for that privilege. This issue is one which occurs frequently in Microfinance lending as well.

The core of the dilemma was outlined in the article as follows: “There is little doubt that instalment loans land some borrowers in trouble. The harder thing to determine is whether there are offsetting benefits.” The article than quotes a lawyer who works for subprime lenders noting that these loans are made to individuals who desperately need money, usually for an emergency that has cropped up in their lives. Unexpected and uninsured medical expenses, car repair issues, and so forth are clearly a threat for the poor in the US given that most poor people also lack savings. As noted in a Federal Reserve study, 30% of the US population did not have resource to make a $400 emergency payment.

However, perhaps the discussion is about the wrong topic. The real issue may be that those using predatory credit are just not earning enough to build up financial security for themselves and their families. Perhaps the real solution is not more regulation of predatory lenders but policies such as an increased minimum wage or support for children as proposed by Mitt Romney so that families are not forced to use the predatory credit that keeps them forever in debt at high interest rates.

No sooner had I posted my comments yesterday than an essay from Tom Peters appeared in the Financial Times. Peters spent part of his career at McKinsey and his remarks were generated in part by the McKinsey settlement regarding their work with pharmaceutical companies (and especially Purdue Pharma) for increasing sales of opioids. But he uses that example to focus on much larger issues plaguing the business world today.

He is especially critical of the current business school model that focuses on marketing, finance and quantitative analysis. But as he notes: “The “people stuff” and “culture stuff” gets short shrift in virtually all cases.”  He further links this problem to the focus of too many corporations on only making profits as preached by Milton Friedman. An issue covered by me in an earlier post.

But perhaps the most important point I took away from Peters’ remarks relate to his early fame when he preached managing by walking around. For Peters this insight made in 1980 focused on the value managers receive from walking around their companies and finding out what is happening with their employees. But perhaps this insight should be extended to managing by walking around in society. Would the McKinsey consultants continued to press for more sales of opioids if they had seen the destruction in communities where overuse of opioids ruined families?

Perhaps a real issue to be addressed is getting our professional cohorts more in touch with the real world and not just the world in which they live. A world filled with other professionals isolated from how most people live. A world with schools that can teach remotely to children with their own laptops and mobile devices? With state of the art internet connections? With the ability to hire tutors as needed? With advantages that will only lead to further inequality?

Two recent articles highlight bad behaviour among professionals – a source of serious concern in our society and especially for banks. On 4 February the Financial Times had a detailed article regarding a settlement between McKinsey and a variety of US jurisdictions regarding McKinsey’s work for pharmaceutical companies relative to opioids. Perhaps the most telling comment was from the Colorado attorney general who noted: “The partners who tried to cover up their actions placed profit over responsible behaviour and acted reprehensibly.” Although his remarks related to the coverup which included potential destruction of evidence, the core of the message relates to professionals who put profit before responsible behaviour.

A similar story of profit before propriety was seen in a Financial Times article covering issues at Credit Suisse in its private bank. In this case the information came to the surface only by accident when a clerical error allowed a confidential report of the Swiss market regulator, Finma. Normally those reports are not publicly available but this one surfaced most likely as part of a lawsuit. As noted in the FT article: “About a dozen senior Credit Suisse executives — including top management — were aware of concerns over Lescaudron and repeated rule-breaking by him, the report said.” Perhaps that is the reason the report like other Finma reports are not made public. One could ask why a governmental body such as Finma is allowed to hide this information from the people who pay for its services.