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.
How Women Will Fix The Economy - Rana Foroohar, TIME
Image: "Bored banker" from efinancialcareers.com.