The writer’s latest book is ‘The Bank That Lived a Little: Barclays in the Age of the Very Free Market’
Just as they did during and after the global financial crisis, banks run the risk of appearing tone-deaf in their response to Covid-19.
Back then, exaggerated claims to be doing God’s work, premature exhortations to move beyond remorse, and cynical gouging of customers sat badly with taxpayer-backed rescue packages. The jarring sound of bankers behaving badly was amplified by their determination to cling on to bonuses while the rest of the world endured the decade of austerity that their actions had caused.
The coronavirus crisis offers them a chance of redemption. It has not been a great start. There has been tension between banks and governments in the US and UK over the administration of state-backed loan schemes for business. Both governments are clarifying their position and the banks, having initially appeared slow footed, must now deliver.
Dividends have been a further source of irritation between the two sides. Major US banks were noticeably absent from the first wave of corporations to waive dividends. In the UK, it took Bank of England pressure — which the banks apparently resisted — to halt payouts to shareholders. Moreover, in contrast to companies operating in some other sectors and despite nudges from the BoE, scarcely a peep has been heard from the banks on bonuses. This most emotive of subjects has the potential to blow up again into a hugely divisive issue.
The crisis and how the banks respond is a real test of the “business with purpose” movement that gathered momentum in 2019. Its most public statement came from America’s Business Roundtable. In enlarging corporate objectives from shareholder value to stakeholder value, signatories from 181 US companies spoke of investing in employees, exceeding customer expectations, serving as good partners to other companies and supporting the communities in which they worked. In the UK, many of these principles were endorsed in the Good Business Charter, a joint enterprise between the CBI employers’ federation and the Trades Union Congress. The current tragic environment is a crucible for these good intentions and as so often, banks are in the mix.
It is a crucial moment for the industry’s reputation. Businesses do not have a future if they are universally despised, a message that will not be lost on the banks. Prior to this crisis they were, arguably, in the early stages of societal rehabilitation. To build on that, they now need to put public interest above self-interest. Without that, banking will remain a pariah industry; with it, banks can repair much of the reputational damage caused by the financial crisis.
There are three steps that banks should take.
First, accept more risk and less profit from lending. That means lowering credit standards and reducing end-of-term borrowing charges in order to help businesses get through the crisis and rebuild in the reconstruction phase.
Second, waive bonuses, particularly in the markets business where traders are making hay. As happened after 2008, distress in the rest of society has led to volatile markets and, by many accounts, exceptional first-quarter trading profits in fixed income and equities. Paying bonuses under these circumstances would be completely unacceptable to the public and put investment bankers back where they were in 2008.
This sacrifice should be industry-led from Wall Street and extend through the boardroom and trading floors. Practitioners should put up their hands now for a voluntary zero bonus. For people whose main job satisfaction comes from the money they make, this is countercultural. But, if they do not show leadership, boards or eventually regulators should step in and do it for them.
Third, and contingent on waiving bonuses, banks must explain clearly to shareholders what they are doing and solicit their support. Some of HSBC’s Asian investors have already threatened action over its dividend suspension.
For US banks, this is the moment to live up to the roundtable’s promises of 2019 and to rebuild, in the words of Jamie Dimon, chairman of both JPMorgan Chase and the business group, the fraying American dream. For UK banks it is a golden opportunity to re-establish a level of trust among investors and with government that might eventually lead to book values being reflected in their heavily discounted share prices.
These are big asks of a sector that prefers to buy rather than give goodwill. It will require turning on its head a me-first culture. But it’s the right thing to do. It would also finally allow this most important of sectors to legitimately claim to be doing God’s work — whoever or whatever their god might be.