I think ex-Co-op Bank chief Paul Flowers has just done us all a favour. His behaviour in front of the Treasury Select Committee last week, alongside this weekend’s slightly stunning revelations about his personal life, should remind us of two vital things.
First, no one really understands all aspects of modern banks, so no one can really run them with any confidence. Some try, and burn out fast – they end up off with stress or resigning. Note the case of poor Sir Hector Sants. Faced with sorting out the compliance of 140,00 Barclays employees in 50 countries, he ended up on sick leave (exhaustion and stress) and eventually resigned.
Some don’t get it, but are deluded enough to think they do (these might be the really dangerous ones). Some know they can’t, so don’t really try. An ex-banker friend of mine points out that Jimmy Cayne of Bear Stearns fell into this category (he played bridge instead), as did Stan O Neal of Merrill Lynch (golf).
Our banks are, in the main, too big and too complicated; they need to be smaller and simpler. Anything that is too big to fail is too big to manage.
The second thing it should remind us of is that banks need to be run by bankers. This isn’t a consensus opinion. One commentator writing a few weeks ago said that it was ridiculous that the Co-op had been told that “its board was not suitable to run a bank because it was not made up of bankers.” Instead, it is “precisely because people are not bankers that they may be suited to their new roles of making sure banks are clean”. But this just isn’t so.
If people with decades’ worth of financial experience can barely get their heads around the working of big banks, what hope is there for a local councillor with a penchant for stress-related crack smoking? And if you haven’t the faintest idea how a thing works, how can you keep it clean? Quite.
However, there is a key point to make here. When I say banks should be run by bankers, I specifically mean bankers – not just anyone with some sort of financial experience. Most people call everyone who works in finance a banker, but working in or around a bank is not the same thing as being a banker.
Take Hector Sants. Everyone calls him a banker, but his career hasn’t been about managing bank balance sheets and balancing loans and deposits. He started as a stockbroker and up until he became FAS chief executive in 2007 the equity markets remained his main focus. Not a banker but a broker.
Another – Stan O Neal. Look at his CV here. He started as an analyst, went on to leveraged finance, etc etc. Jimmy Cayne has a similar CV (municipal bond salesman, stockbroker).
They all know a lot about selling stuff, but what do they know about bank balance sheets? Just working at a bank or being connected to a bank doesn’t make you banker – any more than being a knee surgeon makes you a hospital manager.
You may be wondering what a proper banker is and does. I direct you to the chairman’s report at the front of the annual report for a small and well-formed bank – United Trust. The chairman, Nick Clegg (yes, father of) writes this in the 2012 annual report.
“The Banking industry continues to be the focus of intense regulatory scrutiny and public attention and much is currently written about the lack of an appropriate culture to guide the Banks.
“For us it is clear. Our primary obligation is to those who entrust their savings with us by way of deposits or other loans. It is our duty to ensure that these monies alongside those provided by our shareholders are prudently invested and lent on a well spread basis and that we hold adequate liquidity to match our actual and potential maturing liabilities.
“In addition, we have obligations to our customers, to our shareholders and to society as a whole. We wish to treat our borrowing customers fairly and support them in their endeavours. Through maintaining a stable business we can contribute best to the communities in which we operate and act as a good corporate citizen. And we believe that guided by these principles our shareholders over time will be rewarded with an acceptable and competitive return on their invested capital.”
That’s real banking – for which real bankers are required. It shouldn’t be so hard.