A Special Report on Banking from The Economist offers insight in to the changes we might expect from the world of finance. I like the first few paragraphs (below) which put the scale of the problem in to perspective.
The report shows that the industry will be ruled by attention to liabilities (and risks) rather than assets (and growth opportunity). That is what we are all feeling already. But it is appropriate that that balance is reached.
The report investigates the kind of increasing regulations that banks will face – restrictions on leverage and liquidity. A passive regime must unfortnately be replaced by a more intrusive regime. It seems to me that these rules should be applied on a scale so that bigger organisations will have tougher rules – that would redce the risk of big organisations failing and would make the industry more holonic, rather than monolithic.
Which prompts a critical question of stress tests. That banks should not get in to situations described by stress tests – the industry regulators and internal fiduciaries should be naturally creating a naturally holonic landscape so that a collapse in one product (eg sub-prime loans) does not impact the monolithic industry globally. The only kind of unexpected risk to which businesses might be exposed and might review stress tests, is natural disaster, for which planning is effectively not possible. One can be prepared, flexible and vibrant but that comes from a style of operation not, stress tests and regulations. nevertheless, stress tests are a valuable tool for educating management.
The report also examines changing compensation structures. Compensation must become more transparent. Techniques like bonus/malus, s-curve and equity are discussed. At the end of the day, vesting equity type compensation maintains integrity.
The report notes that the opportunity for growth is developing markets. That means Africa, as well as Asia and South America and Eastern Europe.
The report also raises some pertinent questions: How to regulate low capital businesses within capital intensive organisations? Are there enough deposits to support the scale of the industry today? By how much will the volume of securitisation shrink?
Perhaps the most useful nugget is the review of Svenska Handelsbanken which has been successful in the crisis and uses unexpected management policies. Read the box here.
Here are the first paragraphs:
Banking is the industry that failed. Banks are meant to allocate capital to businesses and consumers efficiently; instead, they ladled credit to anyone who wanted it. Banks are supposed to make money by skilfully managing the risk of transforming short-term debt into long-term loans; instead, they were undone by it. They are supposed to expedite the flow of credit through economies; instead, they ended up blocking it.
The costs of this failure are massive. Frantic efforts by governments to save their financial systems and buoy their economies will do long-term damage to public finances. The IMF reckons that average government debt for the richer G20 countries will exceed 100% of GDP in 2014, up from 70% in 2000 and just 40% in 1980.
Despite public rage over bank bail-outs, the industry has also comprehensively failed its owners. The scale of wealth destruction for shareholders has been breathtaking. The total market capitalisation of the industry fell by more than half in 2008, erasing all the gains it had made since 2003 (see chart 1).
Employees have scarcely done better. The popular perception of bankers as Porsche-driving sociopaths obscures the fact that many of the industry’s staff are modestly paid and sit in branches, information-technology departments and call-centres. Job losses in the industry have been savage. “Being done” used to refer to hearing about your annual bonus. Now it means getting fired. America’s financial-services firms have shed almost half a million jobs since the peak in December 2006, more than half of them in the past seven months. Many have gone for good.
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