Can you imagine a major industry which suffers a near death experience, angers its entire customer base—wholesale and retail, domestic and international—and yet refuses to publicly apologise and adopt a plan of action that commits the industry to not repeating the mistakes of the past. That is where the banking industry is at right now.
This lack of decisive action on the part of the industry’s leadership will do lasting damage to not only the industry but also to its as yet unforgiving customers and the global economy. Part of the problem is that the industry does not appear to even realise that it is in a crisis—one which has been brought about by a complete loss of public faith in its activities. That is a tragedy.
Banks Are Held In Very Low Esteem By All
Most people believe that banks were wholly and solely responsible for the financial crisis. Although that assertion is not entirely true, as governments and central banks also played a major role, the perception and hence the resentment continues to run deep years after the crisis erupted. Perception is reality and it is that reality that banks need to deal with but have as yet failed to address.
How deep and how negative is this perception.
Recently, I was asked to put forward a paper for an online roundtable with a group of economic and political thought leaders. The paper was entitled “Only Bankers Can Create Great Banks Not Governments Or Regulators”. The basic premise of the paper was that no amount of government regulation could in the long term create a sustainable industry.
I expected the discussion to be vigorous and it was. What I did not expect was the downright level of vitriol that was thrown the way of the banks. Amongst these professionals there was very little respect for the industry. It then struck me that if professionals think that way then the average person on the street must be holding even more hostile opinions of banks.
This is a very dangerous and precarious position for banks to be in and here is why.
The Dangers Of Inaction
One of the most remarkable things about the last financial crisis is that many in government, the media and the public are still unable to articulate what happened in ways that bear a logical relationship to actual events. Thus, one hears talk of derivatives, deregulation and casino banking. What is not understood for example is that the main causes of the crisis were an excess of cheap liquidity and the poorly regulated origination of mortgages.
As noted before, perception is reality—and it is this same misperception which is present in the media and the general public that motivates and emboldens governments and regulators to act and impose curbs on the industry. Consequently, banks face an avalanche of legislation and regulation, much of it based on what was perceived to have happened, rather than what actually happened during the crisis.
One of the outcomes of this misperception are the new Basel rules, dubbed Basel III, which when fully implemented will require banks to hold capital equivalent to at least 10.5% of their risk weighted assets (RWA) with further additions of capital to come.
As a consequence of the above capital increases the cost of lending will go up and small businesses in particular will find it very expensive to borrow money. This in turn will reduce economic activity and ultimately make traditional lending unprofitable for the average bank.
Yet, that is the future we are now busily creating.
What Other Industries Do In A Crisis
I well remember the Tylenol crisis of the early 1980s and how that was so effectively managed. Tylenol was a very popular painkiller but tragedy struck when seven people died after taking extra-strength Tylenol capsules that turned out to be laced with cyanide.
The makers of Tylenol, Johnson & Johnson, immediately stopped all production and advertising of the capsules and pulled existing stocks from the shelves. The company applied itself completely to addressing the issue. They came up with tamper proof packaging, something which we now all take for granted, which immediately restored confidence and solved the problem.
In addition, Johnson and Johnson spent a lot of resources educating the public on the new tamper proof packaging and how it was created with their safety in mind.
By exhibiting great leadership and acting decisively, all the time with the public interest in mind, the sales of Tylenol, along with the sales of other pharmaceuticals which were all affected by this shocking episode, quickly rebounded and an industry disaster was averted.
JetBlue Airways was another company that ran into problems which were not of its own making but which nevertheless threatened its business. An ice storm on the US East Coast caused severe disruptions to JetBlue’s operations and damaged it its reputation. The company launched a massive PR offensive and by doing so succeeded in regaining its reputation and the public’s trust.
In each of the above cases, decisive leadership and public advocacy played a major role in restoring damaged reputations and threats to their businesses. It should be pointed out however that in neither case was the company deemed to be the root cause of the crisis.
The contrast with banks that are being held responsible for financial crisis could not be clearer and this is what makes the situation so dangerous for banks.
Urgent Leadership Action Required
The failure of the leadership within the industry to act decisively in terms of addressing past transgressions and communicating how they have or intend to change business practices means that the industry does not have the necessary credibility to argue its case.
A recent UK Parliamentary Commission on Banking Standards is recommending that bank bonuses should be deferred for 10 years. That fact that not many outside of the industry find this suggestion totally ridiculous is just another example of the level to which bankers have fallen in the public esteem and their inability to influence the discussion.
What other such recommendations are there in store for the industry?
The leadership within the banking industry needs to recognise that even while profits have rebounded in many areas, the industry remains mired in a crisis that it urgently needs to do something about.
Jonathan Ledwidge is the author of the book Clearing The Bull, The Financial Crisis And Why Banks Need A Human Transformation (iUniverse).