Boomer Banker

Like many others, I frequently receive e-mails that are all about phishing for my personal data so someone can defraud me of money from my bank accounts. But it appears that banks have also been active with fraudulent activity – not through phishing but through spoofing. And their spoofing activities are proving to be costly as JP Morgan paid a fine of nearly $1 billion as announced last week in the Financial Times. This is yet another example of how banks create financial costs from inappropriate behaviour and culture. And if you were an investor in JP Morgan the appropriate next question would be how much of that fine was recovered from bonuses paid to the individuals involved. I suspect not one red cent.

In a further article in the Financial Times it was noted: “US authorities criticised JPMorgan for failing to fully co-operate at the outset of their inquiries. The Department of Justice noted that the bank began suspending suspected traders on its metals desk only after a second person had pleaded guilty.”  This article noted that the issue is not only for JP Morgan but has also impacted Deutsche Bank where two traders were found guilty of similar behaviour and are facing up to 30 years in jail. And so just a banks want us to be cautious about phishing, it seems like it is also time for them to be cautious about their own spoofing.

In September there were increasing signs of risk in the financial markets. Early in the month the Financial Times reported on worry about real estate lending in the US. There was a 42% increase in loans under stress according to this article. As noted: “The financial consequences of shutting swaths of the US economy to deal with coronavirus are still just becoming clear, as many hotels remain empty, shopping mall traffic is subdued and office workers remain at home. ” But one could argue that this is only the tip of the iceberg as the world adjusts to a post-COVID-19 world. Whilst the article refers to “shutting,” it is more likely the case that individuals are also taking actions to work from home, shop by internet, and travel and eat out less frequently. Many of these patterns are only going to continue or get stronger suggesting that the historic valuations for commercial real estate may not be sustainable.

Later in September, Gillian Tett (also in the Financial Times) noted that “(f)ears of a credit crunch have already hit business confidence and worried banks.” She goes on to provide other evidence from a variety of sources regarding stress in the economy. She notes: “the key point is that chronic stress can be very economically debilitating.” I do not think there is anyone who would dispute that we are in a period of “chronic stress” not only from the impact of COVID-19 but also from political uncertainty and the challenges of societies dealing with embedded systemic racism. Clearly a time to be cautious.

I am honoured to be asked to deliver a course on Values-based Banking for RedMoney Events. It will be 9 and 10 December for 3 hours each day. It will provide an overview of how to be a values-based banker – and why. It will be delivered virtually so no travel or need for special social distancing. You can see a short clip over the course here. And you can register from this link.

One of the frequent criticisms of ESG (environmental, social and governance) standards is the lack of consistency. Whilst this criticism has validity, it has often been used by critics to suggest that ESG is not an important issue for investors. Those same critics generally do not go further to suggest ways in which consistency could be created but rather stop with the criticism. And for too long there have been far too many competing initiatives to deliver consistent ESG reporting.

However, investors and financial institutions are realising that empty criticism and lack of standards are not sustainable. This topic was discussed at the the World Economic Forum based on a white paper published in January 2020. After a comment period, a new paper has been published last week: Measuring Stakeholder Capitalism: Towards Common Metrics and Consistent Reporting of Sustainable Value Creation.

This paper had significant input from the large accountancies with their experience of setting standards for financial reporting. In addition the many initiatives that have been underway to drive consistent reporting in ESG areas have been supporting this effort. As noted in the paper, “the five leading voluntary framework- and standard-setters – CDP, the Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) – have for the first time committed to work towards a joint vision.”

Perhaps the most important conclusion from this report supported by the largest companies in the world is as follows:

(T)hose corporations that align their goals to the long-term goals of society, as articulated in the SDGs, are the most likely to create long-term sustainable value, while driving positive outcomes for business, the economy, society and the planet. This is the true definition of stakeholder capitalism.

It would appear that banks have not only a problem with institutional racism but also with institutional stupidity. This week Reuters reported that the CEO of Wells Fargo, Charles Scharf, wrote a memo to employees noting that “(w)hile it might sound like an excuse, the unfortunate reality is that there is a very limited pool of black talent to recruit from.” This memo was then followed up with similar remarks in a company Zoom meeting. The meeting was seen by some attendees as positive but not all. As the Reuters article further noted: “Senior corporate executives and recruiters said the notion of a shallow minority talent pool is frequently cited as a hurdle to improving diversity but probably reflects insular professional and social networks.” It is indeed likely that those informal networks are why banking has a dearth of diversity in management at all levels – diversity of race, gender and socio-economic backgound.

These remarks led to a very passionate response in an essay in The Washington Post. The writer, Karen Attiah, is a life long Wells Fargo client. After citing the cost of many fines paid by Wells Fargo, she notes: “(i)magine if all this money and effort had instead gone not only into recruiting and hiring Black people, but also toward helping Black people build wealth. Racism is not just a hell of a hard-to-kick drug, it’s an expensive one to boot.” These thoughts echo an issue not only for Wells Fargo but many other US banks.

In the last few weeks two European banks have announced bank branch closures. As noted in the Financial Times, Handelsbanken which has traditionally had a very strong branch based strategy, will be closing nearly half of their existing branches. This strategic change was championed by Lex in the Financial Times who noted it “will make the Swedish bank a stronger institution.” Then this week Deutsche Bank was reported (also by the Financial Times) to be planning to close about 20% of their branches. In both cases it appears that the impact of COVID-19 was part of the motivation for these choices.

Whilst the issue of bank branches is an important one for banking profitability, too often the discussion ignores the real challenges these closings have on many people. Most readers of the Financial Times and other business press are like me very tech savvy and have multiple devices that allow them to access bank services without ever setting foot in a bank branch. But just as we are seeing with remote virtual education for children and young adults, this access is not available for all. Furthermore there are any number of older people who may lack the tech savvy and experience to use the digital alternatives.

Strategies focused on eliminating bank branches are therefore likely to only further exacerbate the issue of access to financial services for the poor, elderly and already disenfranchised bank clients who need banking services to fully participate in the modern economy. Who will speak for them? Or will they be forgotten?

Banks have a constant desire to stay within the rules. Unfortunately this goal is too often executed through a focus on the form of the rules rather than the function the rules are intended to deliver. This week The International Consortium of Investigative Journalists released a detailed study regarding money laundering. Working with information provided them by BuzzFeed News, the consortium did a detailed analysis of the flow of funds in those reports. It should be noted that the reports are confidential and it is not clear how BuzzFeed obtained the files but there has not been evidence that the files are not real.

What is clear from the analysis is that many very large banks continue to process very large transactions that have dubious backgrounds. Whilst banks should not be responsible for law enforcement, they do have a responsibility to conduct transactions with integrity. Large transfers of funds intended to whitewash money and defraud governments should not be part of a bank’s activities. Given that the amounts tend to be very large, it is difficult to believe that the bank’s can not take actions to prevent this type of whitewashing.

Of course the banks respond by noting they are not able to comment on client specifics. But that does not lessen their responsibility for knowing their clients and enforcing standards of integrity. And the transactions analysed are just a small portion of the total reports filed (0.02%), what has been reported is surely only the tip of the iceberg.

This week Megan McArdle in The Washington Post had a useful essay on the reaction of the investment banking world to COVID-19 and work habits. She writes about her prior experience working in an investment bank where the importance of being in the office was critical – even if there was no useful work to do.

She noted: “This system is legendarily abusive, and arguably unproductive. But it was durable, at least until covid-19, when a flurry of stories suggested that investment banks were ‘rethinking their pre-coronavirus lifestyle of exhausting global travel, interrupted family time and all-nighters in the office.’”

She then goes on to highlight a particular element of the investment banking culture: “:So I suspect that bankers are going back to the office, not because the organization or the nation requires it, but because bank culture has spent decades filtering for macho displays of pointless sacrifice, and the people at the top are apt to be among those who most enjoy them.”

I think the core to the last comment relates to the issue of “macho displays of pointless sacrifice.” Is this culture one which will allow finance to benefit society? Or one which only allows those to succeed who could care less about the impact of their work on society?

As noted in an earlier post, part of the US regulatory structure is busy looking at rules to prevent pension funds from looking at ESG factors in making investment decision. Interestingly a subcommittee of the Commodity Futures Trading Commission (another US regulatory body) is clearly warning of the risks of climate change for the financial system. This report was reported by the Financial Times in an article that notes this seeming discrepancy between two regulatory agencies. It does raise the question if the right hand knows what the left hand is doing.

At the same time it is heartening to see that even US regulators are beginning to sound the alarm on risks from climate change. The full report of the sub-committee is available for all to read. It correctly notes in its summary that “(c)limate change poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy. This reality poses complex risks for the U.S. financial system.” I encourage all bankers to read this report and consider actions they should be taking to mitigate the identified risks.

Two recent articles highlight for me the importance of culture in banks. Over the last several years compliance departments have grown enormously in banks to address shortcomings in practice. But it is increasingly clear that a bank can never hire enough internal police to prevent problems. Rather banks must develop cultures where all employees know what is right and wrong. And this issue is not specific to any geographic area although it does seem to be linked to large banks with complex operations.

Just one week ago the Financial Times reported on the issue of spying at Credit Suisse. This scandal has been going on for some time and led to a change in the CEO. The Swiss regulator appointed an independent investigator to gather the facts and his report appears to be complete. And if that report does not create enough heartburn for Credit Suisse, the FT article provides a number of additional cases where problematic behaviour by bank staff has been cited. Again indicative of a culture lacking a focus on integrity.

Meanwhile on the other side of the pond, JP Morgan Chase has stated that some of its staff and clients may have abused the Paycheck Protection Program set up to support the US economy during the COVID-19 pandemic. As reported by Bloomberg yesterday, the “New York-based bank said it has seen ‘instances of customers misusing Paycheck Protection Program Loans, unemployment benefits and other government programs’ and that some ’employees have fallen short, too,’ according to a memo to staff from the bank’s senior leaders Tuesday.” Whilst it is important that JP Morgan Chase is pro-actively attacking this issue, the underlying cause of some employees lacking a culture of integrity also needs to be addressed.