March 2011

We are now three years into the recession and the banks continue to be bashed.

The most recent attack (March 2011) is from the governor of the Bank of England Mervyn King in the Daily Telegraph. http://www.telegraph.co.uk/finance/economics/8362959/Mervyn-King-intervi…

In response to Mervyn King’s comments, one senior banking source, at one of the UK's top five banks, branded Mr King "an embittered old man with no appreciation of reality". (Telegraph website, March 6th  2011).

So, who is most in touch with reality and what can banks do to recover trust?

Here is my understanding of how the banks currently see “reality” and how they would argue their case (using Barclays as an example).

1. Our purpose remains financial growth (see the Barclays strategy on their website).  
2. We have proposals for retaining more money in the system in the event of a future run on the banks.
3. Our biggest social contribution is to extend credit. (“Banks have an obligation to extend credit to households and businesses, enabling them to create growth and jobs - it is their prime social purpose”. John Varley, as CEO of Barclays, June 2010.)
4. In addition, we also make a contribution to society by “the payment of tax; the employment of a large number of people in the UK; the payment of dividends; and the making of other contributions to the communities in which they work,” (statement of the banks on the Merlin Agreement, February 2011)
5. For society, read our immense investment in communities. (In fact, the involvement of employees in the community according to new Barclays CEO Bob Diamond is “the thing at Barclays that makes me most happy”)
6. The payment of bonuses is required to retain talent.
7. We probably accept the need for new thinking to protect customers (through the proposed new Consumer Protection and Markets Authority).
8. On financial capability, the biggest actions we can take is to encourage financial education, especially to young people.  See Barclays latest announcement here: http://www.newsroom.barclays.com/content/Detail.aspx?ReleaseID=1917&News…

Is this enough? Not nearly enough.  So what would I expect?

1. I would expect the starting point to be a focus on working together to create an economically sustainable future. The G20 statement of April 2009 said: “we will identify and work together on further measures to build sustainable economies.” So, what are banks doing to create sustainable economies?
2. As a part of this I would expect banks to understand the consequences of their previous models. According to Lord Turner, Chair of the Financial Services Authority:  “hundreds of thousands of British people are newly unemployed; tens of thousands have lost houses to repossession; and British citizens will be burdened for many years with either higher taxes or cuts in public services.” (September 22nd 2009)
3. I would expect a feeling of energy and leadership by the banks to create the circumstances for future vibrant economies. I believe that they could and should collaborate at scale to help create sustainable economies and sustainable communities, In fact, I do not believe it is going too far for banks to begin to explore a shared strategic ambition to reduce poverty as an anchor on economic growth. It makes commercial sense and they have the muscle. They simply lack the ambition and the will.
4. I expect a public articulation of the beliefs that drive their business decisions and a clear and public articulation of their business models. Two years ago Samuel J Dipiazza Jr, president of PricewaterhouseCoopers, said  “the current financial crisis is the result of short term and unsustainable business models”. So, what are the sustainable business models of each of the banks?
5. I expect purpose statement of banks to be about customers and how their core products and services are helping their customers achieve their goals in life. In the Barclays articulation of strategy, customers feel like a means to an end to achieve their financial success.
6. I also believe we as customers need a much better understanding of how the finances stack up. If I deposit money, I expect my money to be safe and if banks use my money to create more money I expect to get some of the benefit.  If banks lend me money I expect all the costs to be clear and transparent.
7. In terms of the biggest single contribution banks can make to financial capability, the answer isn’t another education pack aimed at young people. There should be cross-industry collaboration on a massive programme to change customer behaviours so that they are acting for their own financial future. Financial awareness is not enough.  Success in achieving real behaviour change is the measure of success. This is a social and a commercial win-win as it also grows their markets.
8. I think they need to revisit their belief that talent is scarce and that is why bonuses are justifiable. I’m not at all convinced this is not simply self-serving. I am with Tomorrow’s Company that there is an abundance of talent.
9. And yes of course they should continue with the structural changes. But the sum of them should be more sustainable economies (not just reducing future risk but increasing shared wealth).

The words of the G20 statement in April 2009 still ring true: “confidence will not be restored until we rebuild trust in our financial system. We will take action to build a stronger, more globally consistent, supervisory and regulatory framework for the future financial sector, which will support sustainable global growth and serve the needs of business and citizens”. We’re not remotely there yet. Until we are, Mervyn King’s comments will have more resonance for people outside of the sector than un-named senior bankers who suggest it is Mr King who is out of touch with reality.