Politicians need to bite the bullet over bank segregation
The banking industry in many parts of the world has undergone a massive restructuring and a very torrid and damaging time to its reputation as an ethical and honest provider of banking services.
A great deal of this opprobrium was self-inflicted and brought about by a culture of "growth at any price" and no concept of basic reward for proper underlying performance.
The industry is desperately trying to recover from this debacle and is in the process of recapitalising itself. What has become extremely evident throughout this process over the last five years is that with the banks trying to rebuild their balance sheets, and with the regulators attempting to atone for their lack of attention to crucial issues over the last 15 years, a combination of extreme liquidity requirements and substantial – if not excessive – capital requirements are now being imposed on the industry.
The reality is that until the banks –certainly in Europe – are recapitalised, and meet liquidity norms set by the regulators, there is little likelihood of them stopping the deleveraging process and actually starting to lend to customers again.
In addition, the interest rate environment driven by vast quantities of quantitative easing is militating against their return to anything like normal profitability and the ability to build their capital bases organically. It doesn't look as though this is going to ease in the foreseeable future.
Almost two thirds of senior bankers believe that there are significant cultural problems across the industry and a similar percentage also believe that compensation levels were a significant cause of this.
About one third, though, do not believe that this was a problem in their own banks.
Bankers say that the main cause of the cultural problems were misaligned incentives, poor leadership and that neither senior management nor the boards which monitor it were up to the job.
Almost two thirds of the bankers interviewed in the survey believe that light-touch regulation and inadequate supervision contributed mightily to the cultural issues that were faced.
Additionally it was difficult, if not impossible, for supervisors to keep up with the new products and technologies.
In my view, in the end the only solution which will prevent a recurrence of problems is to spin off the investment banking arms of the banks and let commercial bankers run commercial banks – providing a rate of return that is commensurate with the risk.
In the Gulf countries we have not seen anything like this disaster with the exception of Dubai – where a similar culture and asset bubble created all kinds of problems for the banks.
One also would have some doubt as to whether all the recognition of non-performing assets has been as robust as it might have been. In other jurisdictions governments have removed property assets from the banks balance sheets in essence creating a "bad bank" but removed from the actual "brand" itself.
Really in my opinion all this does is encourage bad practice and a continuation of aggressive lending and competitiveness. Many bankers believe that it will take three or four years to get the culture in the industry back to where it ought to be.
I believe this to be arrant nonsense: it took at least 20 years to create the problem and it is going to take a long time to redress this and persuade "ordinary" bankers that their own behaviour has to change – led by senior executives who are also prepared to change. Remuneration levels and policies must also change.
The notion of profit-sharing in transactions has no place in commercial banking. Let the investment bankers do what they will with this, that is their problem, but especially in an environment where customer deposits are not at risk.
There is then a long journey ahead, and it has not been helped along the way by the behaviour of the politicians and the regulators who, in my opinion, have failed to bite the bullet in respect of segregation of investment and commercial banking.
Generally speaking banks in the region have weathered the storm quite well, but there are some very substantial lessons to be learned – both at local level and internationally. One hopes that these have been heeded.
Banks have gone through damaging times