Boomer Banker

At a time when there is great focus on how justice is dependent on wealth and power, it is not surprising to see again a bank try to avoid being responsible for wrongdoing. Goldman Sachs employees were actively involved in a scheme in Malaysia that looted funds ($2.7 billion in fact) from Malaysia’s sovereign wealth fund. This scheme was facilitated by Goldman employees. As noted in the New York Times, “(t)he fund was meant to finance projects for the benefit of the people of Malaysia, but some of the cash went to buy luxury apartments, yachts, paintings and even finance the movie ‘The Wolf of Wall Street.'” Somehow fitting that a film on the bad behaviour on Wall Street was involved in this scheme.

For its work, Goldman earned $600 million in fees. The fines it is expected to pay in both Malaysia and the US are expected to be well in excess of that amount. And of course some of those fees were used to pay bonuses to Goldman staff. The CEO of Goldman has apologised for what occurred and is typically the case blames it on “rogue employees.”

As one digs deeper into the story as reported, it is clear that there are many connections between Goldman, the law firms involved and the individuals at the US government involved in determining the ultimate fine and plea from Goldman. Or course if it was a much more minor offence, the defendants would not have the advantage of those connections nor the funds to pay for expensive legal advice. So when the top of major banks speak about the need for social and economic justice, it only seems fair to ask them to abide by those same rules.

With ongoing focus from a variety of stakeholders on sustainability, banks need to be looking for ways to focus their operations to be more conscious of sustainable practices. This will especially be needed if the capital regime creates incentives as noted in yesterday’s post. Fortunately there are many examples of best practice available to consider.

There is probably no better endorsement of the importance of focusing on climate risk than having a major consulting company publishing their thoughts. Whilst this has the goal of securing clients to use their services to implement better management of climate risk, it does provide useful insight into opportunities. McKinsey and Company published in depth research on these risk on 1 June. This article is a good summary of issues to address and helpful reading for any bank looking to up their game in managing climate risk in their portfolios and activities.

The Sustainable Financing Platform in the Netherlands is less commercially oriented than McKinsey. They have published a paper highlighting the opportunities and risks for financial institutions from addressing issues of biodiversity. This is a very practical paper with concrete examples from the financial institutions that comprise the platform on their own practices. Thanks to Gijs for sending this link through.

Overall the increased interest in the issue of climate risks shows that the banking world is in transition. It is increasingly focused on how to address this risks. Hopefully banks have not waited too long to develop this focus.

Finance Watch has put out a meaningful report today on breaking the climate change doom loop. This report, written by Thierry Philipponnat, provides very concrete suggestions on how regulators can use capital regulation to encourage banks to reduce their financing of companies and projects that rely on fossil fuels. If implemented, this approach will make fossil fuel financing more costly to the banks. That should be encourage banks to either pass the costs on or refrain from financings that have long term negative impacts on the environment. Most importantly the recommendation works within the existing framework which should make it more likely to be implemented – although there will be challenges in doing so.

In its coverage of the report, the Financial Times noted that “tackling (climate change) through changes to global regulation may prove difficult.” But the pressure on large banks in this area is growing as evidenced by other actions cited in that article including earlier reports from ShareAction and BankTrack as well as comments from Huw van Steenis and Christopher Hohn. Clearly banks should be thinking about the impact on their capital from continuing to finance fossil fuels.

Although this blog is focused on banking, a key banking function – lending – is also provided by non-banks in many countries. In the US community development finance institutions (CDFIs) are a major source of credit for businesses operating in disadvantaged communities. These businesses are often owned and operated by minorities or individuals facing a lack of credit from banks that see them as too risky. And CDFIs often provide not only credit but other forms of support to strengthen these businesses that help build healthy communities and address the inequities in the US economic system. A good source of information on CDFIs is the Opportunity Finance Network, a trade association for CDFIs.

The importance of CDFIs was highlighted in an article in today’s New York Times. This article provides examples of how CDFIs mobilised people to protect businesses in communities facing violence during the current unrest in the US. CDFIs provide an example of client focus that should be taken on by all banks. If the US is going to address the deep seated issues of inequality, banks need to look beyond their current models and support individuals and enterprises that can make a positive difference in communities of need – even if it requires taking on more risk and being more actively involved.

I am catching up on older stories and having spent time yesterday in the Americas, realised it was time to return to Europe on the other side of the pond. One of the most notable results of the reactions of banks and their regulators to the financial crisis of 2008 was the focus on building capital. In general the US banks were forced to quickly increase their capital levels, even if it meant pain for their shareholders. As a result the large European banks continue to have lower levels of equity to assets than then large US banks. This comparison can be seen clearly in the research of the GABV (page 12). In fact the level of equity to assets for the large European banks at the end of 2018 was just over half of the level of the US banks.

With this comparison in mind, a recent declaration by the European Banking Authority should be taken with a very large grain of salt. As noted in the Financial Times, the EBA is “hopeful” that there is enough capital to survive the COVID-19 driven economic downturn. I would be very cautious on that conclusion but we should all be “hopeful” that the EBA has it right. More importantly I believe that this situation shows that deferring the pain of building strong levels of capital is not a good idea. As with any treatment for an illness, taking immediate needed action although painful is likely to lead to better results.

It is with sadness that I watch from Amsterdam the social unrest in the US. Coming on top of the economic crisis resulting from COVID-19, the challenges facing society and its banking system is only greater. Therefore I read with interest the proposed regulatory change from the Office of the Comptroller of the Currency regarding the Community Reinvestment Act. That act was intended to address the conscious discrimination by banks relative to lending to communities where housing ownership was shifting to people of color. Banks and government agencies that provided guarantees for mortgages would literally draw a red line around certain communities noting that no mortgages would be allowed within those red lines. Needless to say that led to decreases in property values and ensured that home ownership, a classic source of wealth accumulation in the US, was not available to many.

Whilst it may be time for revising and improving the rules implementing the Community Reinvestment Act, as noted in the New York Times, the Comptroller of the Currency seems to be forging his own path. That path seems to be based in part on challenges he faced as a banker. More importantly he has been unable to secure support from the other US regulators and even the mainstream American Bankers Association. It seems to me that pushing forward on this initiative at a time when the negative results of racial and economic inequality are being evidenced every day in the US is wrong. These changes are not going to provide support for banks but only perpetuate a system that creates an unhealthy and unsustainable economy – never good for banking.

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.