Tuesday, 19 May 2015

Banking should not be boring



Since the financial crisis, some people have argued that “Banking should be boring”. The idea is that banking should be limited to simple deposit-taking, lending and payments services. We don’t need the trappings of modern investment banking: structured lending schemes, derivative products, complex risk metrics, synthetics and the like. They may be fun to create, and highly lucrative to trade, but they aren’t socially useful. Let’s get back to basics. All we need is little banks, simple products and local bank managers operating the 3-6-3 rule: “Borrow at 3%, lend at 6% and be on the golf course by 3pm”. Banks are so much better when they are boring.

Of course, this depends on what you mean by “boring”. A friend of mine is a civil engineer. She is fascinated by sewers. No, this is not a joke (and yes, I know about the “Yellow Pages” advert for civil engineers that said “Boring: see civil engineering”). She really is. Peering into smelly sewers all day is not my idea of an interesting job: I’d much rather work in a bank. But to her it is fascinating. So those who regard vanilla banking as boring probably don’t want to be bankers. Bankers themselves may well see it differently.

In fact when I asked people on Twitter what they meant by “boring” in relation to banks, it became clear that they didn’t really know what they meant. Some people used “boring” to mean “not immoral or illegal”. Hmm. Just think about that definition of “boring” in relation to, say, sex….

Others used “boring” as a synonym for “safe”. Oh dear. Bankers who are obsessed with safety are anything but safe. They lend at risk (because that is what banks do), then they offload the risks on to someone else, wash their hands and move on to the next risky loan. Where those risks end up is not their concern. The trouble is, when everyone is playing “safety”, the risk ends up with some poor sucker who can’t afford to pass it on. When the time comes to pay out, those poor suckers can’t afford the payout either and the government has to step in. This is how financial crises happen. Risk aversion among bankers is a BAD thing. Their job is to manage risk, not to avoid it.

There is of course another way of playing “safety”, and that is not to lend to anything that looks even slightly risky. This has an extremely unfortunate economic effect. People who need finance for house or automobile purchases can’t get it. Businesses needing loans for expansion or working capital finance can’t get them. Businesses that already have loans or overdrafts may find their facilities reduced or cancelled. We have seen all of these since the financial crisis. And we hate it. We complain that “banks aren't lending”. We call lack of low-deposit mortgage lending a “market failure”. And we blame lack of bank lending for the slowest recovery since World War II. So we don’t really want bankers to play safe, do we? If “boring” means “safe”, then we actually don’t want banking to be boring at all.

One commenter insisted that excitement in banking is a bad thing. He wanted banking to be so dull that it is soporific. But soporific banking was exactly what we had prior to 2008. Bankers were so convinced that everything was fine that they weren’t paying attention to the risks. They were asleep at the wheel, along with their regulators, auditors and insurers. So were ratings agencies, politicians, economists, business leaders and the general public. There was a mass outbreak of narcolepsy, and it caused one of the largest car crashes in history. More sleepiness in the banking world is the LAST thing we need.

Ah, say some, but what we don’t want is all the creative stuff that nearly blew up the world in 2008. You know, the fancy derivatives, structured products, complex funding structures….

I do indeed think we could do with less of the fancy stuff. There must be markets in risk – after all, for everyone who is trying to reduce risk, there needs to be someone else who is willing to increase risk for a fee. And we do need depth and liquidity in financial markets. But we probably don’t need these markets to be as huge as they have become.

The trouble is that by defining the fancy stuff as “exciting” and basic banking as “boring” we are sending completely the wrong message. If we really want to attract more people into basic banking and fewer into derivatives trading, we need to change the narrative. Trading is boring. It really is. All traders do is move money around. It’s unutterably dull. Lending to small businesses, though….now that’s interesting. They are all different, and to establish whether or not they are sound, you have to find out quite a bit about them.

In fact I am totally bemused by the idea that “banking should be boring”. How can lending to small businesses that are doing exciting and important things possibly be “boring”? How can providing state-of-the-art payments services to support spending decisions by people and businesses be “boring”? How can helping people satisfy the financial needs that arise from their complex lives be “boring”? I don’t get it. This is fascinating stuff. It’s endlessly varied: it demands lively intelligence, rapid assimilation of knowledge, empathy with people’s concerns, creativity in fulfilling unexpected and unusual customer needs, advanced technological knowhow. Basic banking – lending, deposit-taking, payments services - should be one of the most interesting jobs in the world. Why on earth do we want to define it as “boring”?

Banking must be interesting if it is to be effective. Do you want to work in a boring job? I don’t. Nor would anyone who has enough talent to do something more interesting. But we need talented people to want to work in banking – not the fancy stuff, but the bread-and-butter business of lending, deposit-taking and payments. As the economist Anna Hedge explains:
Until and unless we eliminate scarcity, can simultaneously produce all goods everywhere and have no barriers to labour migration, we are going to need banks and a medium of exchange. I do not want those functions performed by dullards.
It’s also terribly dangerous for such an important job to be boring. Boring jobs create bored people. And bored people don’t do a good job. They are careless, they cut corners, they are indifferent to customer concerns. They may be cavalier about regulation designed to protect customers and maintain financial stability. They may even do insanely risky things just to relieve the boredom. We really don't want bored people managing our financial system. Banking must be interesting, or it is unsafe.

It is a tragedy that lending and managing money in the real economy has come to be regarded as “boring” while much less important functions are apparently “exciting”. And it is even sadder that well-meaning people reinforce this topsy-turvy view in the name of banking reform. Somewhere along the line our priorities and our values have become seriously distorted. We desperately need to reframe.

Related reading: 

How Women Will Fix The Economy - Rana Foroohar, TIME

Image: "Bored banker" from efinancialcareers.com.

14 comments:

  1. You described the role and ethos of the old merchant banking houses.

    ReplyDelete
  2. Let me add my two cents - Bankers need to earn more boring paychecks.

    ReplyDelete
    Replies
    1. The vast majority of "bankers" - by which I mean people who do the important job of lending and managing money in the real economy - earn extremely boring pay checks. They are ordinary people doing ordinary jobs for ordinary money.

      Delete
  3. There is no need whatever to choose between boring and exciting banking. The solution is to let people do absolutely any sort of banking they like, but keep the various forms of banking SEPARATE. That way if a risky type of lending fails, the rest of the system isn't threatened.

    Of course bankster / criminals want to retain the existing non-separated system because it enables them to use grandma’s savings to bet on dodgy derivatives.

    That separation was advocated by Milton Friedman, Laurence Kotlikoff and most of today’s advocates of full reserve banking. That is, under most versions of FRB, those who fund banks buy into a unit trust (“mutual fund” in the US) of their choice. They can buy into a fund that specialises in safe mortgages, dodgy NINJA mortgages, SME loans, or whatever they like. If they choose something risky and lose their money, who cares?

    ReplyDelete
    Replies
    1. This is already happening: http://imgur.com/rZOeOnB
      But be careful what you wish for! The next crash will be bigger as a result.
      We are fighting the last battle. In 1998 when LTCM blew up, banks survived and thrived being able to feed on its corpse. Hedge funds learned and were more careful afterwards, and banks learned as well not to trust the hedge funds tightening their risk management as prime brokers. In 2008 hedge funds were absolutely fine, but banks collapsed. As a result they became way more careful, almost too careful, and regulators tightened their leash to make then even more risk averse. Other economic agents? Not so much. Look at corporate leverage at all time high for example. The next crash will see banks doing just fine, while the rest of the economy wonders why there's no liquidity, companies have no access to finance, their retirement accounts post record losses etc etc

      Delete
  4. Would you agree that payment services and current accounts should be nationalized, so that banks are free to concentrate on their risky activities? Current accounts are citizens' main source of liquidity ("currency") which IMHO makes banks such a politically sensitive industry.

    ReplyDelete
    Replies
    1. Neuromancer,

      You’re spot on. That was exactly the point that Irving Fisher made in the 1930s: that is he pointed out that bank failures had led to the disappearance of six billion dollars worth of peoples and small firms cheque book money, i.e. money they held for day to day transactions. That undoubtedly exacerbated the 1930s recession. And six billion in 1930s money would be something like 60 billion today.

      If that money (as you put it) is “nationalised”, i.e. takes the form of base money rather than DIY funny money produced by private banks, then the failure of private banks will not lead to the disappearance of the above cheque book money. As Irving Fisher put it, “We could leave the banks free…to lend money as they pleased, provided we no longer allow them to manufacture the money which they lend.”

      Delete
    2. Neuromancer,

      It's an attractive idea. Various different forms of it have been suggested - the best-known is probably Positive Money's suggestion that current accounts should be on the books of the central bank. The Bank of England's Andy Haldane stopped short of this but did suggest a common payments utility with a universal gateway, which would break the stranglehold that the big retail banks have on access to the payments system.

      Ralph,

      What Neuromancer is suggesting is not nationalisation of money creation. It is nationalisation of the transaction accounts through which money flows. Money creation would still be consequent on bank lending.

      Delete
    3. Indeed, of course you've thought this through. "Money creation" is a moral lightning rod, what makes banks TBTF and allows them to extract rents is that their failure threatens the payments system. Guaranteeing this system in some way without guaranteeing the private parties themselves would neutralize this threat.

      I look forward to reading your further thoughts on the subject.

      @Ralph: James Tobin too, after the S&L crisis.

      Delete
    4. Neuromancer,

      Re “I look forward to reading your further thoughts on the subject”, I’ll take you at your word. Here goes..

      I’m darned if I know how you “guarantee this system in some way without guaranteeing the private parties” unless you dispose of privately created money. Privately issued money is a liability of a private bank. If taxpayers take care of those liabilities when a private bank makes mistakes, then ipso facto taxpayers take care of, or subsidise the private bank.

      A apparent escape from that check mate position is FDIC type deposit insurance. But that strikes me as a farce, for reasons I set out here:

      http://ralphanomics.blogspot.co.uk/2015/04/fdic-type-deposit-insurance-is-joke.html

      Delete
  5. Thanks for this - it's a useful perspective shift. When I was first looking for jobs in IT, a family friend who had a fairly senior position at IBM UK* told me the key to a career in IT wasn't to learn all about computing - the technology changed too fast - but to learn all about /what it was used for/, the kind of problems people had in business & tried to solve with computing. I was interested in computers and wasn't at all interested in business - and, being 21, I had limitless faith in my own judgment - so I ignored the advice completely. He was right, though - and something similar applies, or ought to apply, to banking: what's interesting, even exciting, is what people can /do/ with money.

    But the assumption that banking is more exciting the more it approximates to a drunken sailor in a casino has been around for a long time. When I finished my English degree the university careers advisor tried to interest me in banking - but not, he hastened to assure me, the dull, ordinary kind of banking: this was merchant banking, or as he liked to call it "buccaneer banking". Considering that's how they were actually recruiting people, it's only surprising things didn't blow up worse and sooner.

    *For the record, he was no practical help at all. He told me he had contacts; these turned out to be BNFL and Turner & Newall, neither of whom were recruiting at the time (fortunately).

    ReplyDelete
  6. Fascinating and refreshing post, Frances.

    Boredom is an aspect of the intellect and it's imagination - not so much of the actual outside world and it's activities.

    The scope of banking proper and what it touches is huge.

    Investment banking and trading are less grand in scope by comparison.

    ReplyDelete
  7. This is one of the best articles I have read from you, Frances. I have spent 40 years in banking, in 6 countries altogether, dealing at different times with multinationals and SME's (whereby I would define SME's as privately-/family-owned and not by size because some of them get truly huge and global; Cargill, for example). I would say that those bankers who have spent their professional lives exclusively with publicly-traded companies, perhaps always in transaction banking, are missing out on a lot of what banking is really all about. Among others, it's the difference between being one out of many suppliers of financial products & services on one hand and being one out of few financial partners on the other. Anyone who thinks that the latter is boring has never experienced it.

    ReplyDelete