Aristotle allegedly suggested that making money of money is the profession of parasites. That might be too dramatic — and I am speaking as a banker — but let us agree that much of banking is a rightfully regulated public service. Therefore, banks must never be single-minded profiteers, but always also act as essential guardians of a well-functioning market infrastructure. Sadly, it seems crazy Dionysus, not wise Apollo is ruling the modern temples of mammon: many bankers these days appear to have lost any commitment to public virtues and the common good, and prefer to practice corporate irresponsibility for the sake of incremental alpha. Unsurprisingly, then, every other year we are sitting here and paying the bills for yet another outrageous financial services scandal. Will it never end? Is there no way to (eventually) get more accountability in Banking?
Well, we have been here before. After the 2008 financial crisis, we all vowed to increase regulation, and — above all — reform the incentive structure in banking. We promised to tie bonuses to long-term value creation, rather than short term speculation — mostly by installing multi-year deferral periods and making it easier to claw bonuses back. And of course: “no one is above the law”, as Joe Biden once again menacingly claimed only last week. Only, we all know that is not true. In fact, whilst governments around the globe have been busily crafting new regulations (many of which were never implemented), hardly any failed banker has gone to jail. As Brooke Masters writes in today’s FT, only “eight years after Wells Fargo’s misbehaviour was made public, US prosecutors brought their first prosecution”. By the way, like in the (in)famous Al Capone trial, Carrie Tolstedt, WF’s former retail banking head, pleaded guilty to a technical mishap — nobody so far has been charged over Wells Fargo’s immoral sales tactics. Hence, if our justice system is unable to deal with (executive) failures in banking, and our upgraded bonus systems are not effective, what else can we do?
I would observe a few things:
- Firstly, regulation is necessary and has certainly made a difference. As Christine Lagarde points out, financial resilience in the Eurozone has significantly improved. And since the Wirecard scandal and many others, national agencies are slowly rising up to the challenges. BTW — the Bank of England apparently warned US watchdogs of increasing risks at SVB already 18 months ago so there was ample time to intervene, had there been the political will to do so.
- Secondly, incentives are problematic at the best of times. Even when well-intended, they seldom further good intentions. Hence, maybe the point is not to make them more sophisticated, but to drop them altogether. As soon as we accept that banks must fulfil the role of a public institution, we simply cannot allow them to be motivated and inspired primarily by financial returns, and instrumentalised by greedy shareholders. In case someone is protesting: let me be clear. It is ridiculous to assume that banks are owned only by their investors - including pension funds, oil-drunk Emirates or private stockholders - when every bank deposit is guaranteed by the State as the lender of last resort, and every banking failure repaired with coffers full of taxpayer’s money. And I am not suggesting to cut bonuses for everybody, but solely for executives. Like Plato’s guardians of the republic, we should reinforce the notion that senior bankers are bureaucrats, responsible to society at large, not car salesmen or reckless entrepreneurs. Let banking be “stunningly boring”.
- Which brings me to the third point. Whatever incentive or regulatory structures we put in place, it is often the wider context and culture that corrupts. It is not enough to make everybody swear a banking oath (as I did when I joined banking), if thereafter the only thing that matters is the budget and ROE. Where toxicity is tolerated, toxicity rules. Hence, we must hold supervisory boards and HR teams accountable for a much more careful selection of executives as well as for the active maintenance of banking “virtues”. We need competent people who have good character — who care about the essence of banking, and are not going to be seduced by big bonuses or addicted to the euphoria of creative finance. And who are willing to stand up for what is good. In that context it is not even funny when Credit Suisse chair Axel Lehmann and CEO Ulrich Koerner wrote emails only hours after the UBS merger to reassure staff that bonuses and raises will go ahead. Or that people like Greg Becker, CEO of SVB, who made 9mn annually in total comp, cashed in 30 millions-worth of shares during the last two years, including a 3.6mn chunk just days before the bank sparked a deposit run and eventually was bailed out by the Federal Deposit Insurance Corporation. Which of course also raises the question of who is sitting on these supervisory boards and what their accountability is: Alex Lehmann & co, it is time for you to go!
But, finally, if we are honest, this is not just about banking, but about our collective way of dealing with money. If we want to rein in excesses in banking, we must insist, as Aristotle suggested, on the positive contribution of the financial system to the collective well-being of society. We must scrutinise every aspect of our “financial economy”, including stock markets and financial instruments, and ask whether money is promoting our collective interests. Is it supporting real people and the real economy? Is it endorsing the values and virtues we stand for? Is it financing those endeavours that bring out the best in humanity? It simply isn’t just about incentive schemes, CET1 capital or liquidity coverage ratios, and not even about whether banks are too big too fail, but about making sure that money serves, not rules.
