Tuesday, 17 December 2013

It's A Wonderful Life! Or at Least it Could Be...

It is now a full five years since the Credit Crunch, when the global banking system was just a whisker away from total collapse.  In the USA the first sign of what was to come occurred when the housing bubble burst.  Sky-high house prices, fuelled by reckless ‘sub-prime’ mortgage lending, eventually crashed, causing lenders to foreclose on over a million hapless home owners. In the UK we witnessed the dramatic downfall of Northern Rock, and the dismal spectacle of worried depositors queuing round the block to withdraw their funds. This was a classic example of a run on a bank, and the only one I can think of in recent times.

James Stewart Facing a Banking Crisis

To understand what a run on a bank truly means, you could do a lot worse than sit down and watch that classic Frank Capra movie It’s a Wonderful Life.  After all, it is nearly Christmas!  In this film, the family-run building society of Bailey Building and Loan, nearly goes under thanks to the absent-mindedness of long-serving employee Uncle Billy.  On his way to the bank to deposit a substantial amount of cash, Uncle Billy meets up with the Machiavellian Mr Potter, gets distracted, and manages to lose the cash.  Unfortunately this happens on the self-same day that a bank examiner arrives in Bedford Falls to carry out a routine financial audit at the Building and Loan.  Word gets out that the company is in trouble, and frantic investors mob the bank to withdraw their cash.

In It’s a Wonderful Life there is a guardian angel on hand to sort things out, and in a climactic, heart-warming scene the Building and Loan company is saved by the generosity of the local townspeople, who all like and respect the owner of the company, George Bailey, and who chip in to help him out.  In the real world of the 2008 financial crisis, there was no guardian angel and the resolution was not quite so joyful: global economic meltdown was only averted by governmental intervention and the bailout to the big banks with billions of dollars of taxpayers’ money. Check out this link for a list of the big name banks, and how much bailout money they received.

Not surprisingly, bankers have been somewhat unpopular ever since then. Nobody wants a repeat performance of the crisis and the bailouts, and financial regulators around the world have been busy trying to sort out the mess. In the US, the Volcker Report recommendations have just been approved by  the Federal Reserve and the Federal Deposit Insurance Corporation,  and enthusiastically endorsed by Barack Obama.  In Europe the regulatory framework known as Basel III  is in the process of being rolled out, along with other, separate national initiatives such as the UK government’s Vickers Report.

So everybody’s savings should be a lot safer now, right? The truth is, it’s still very hard to be optimistic about the state of our banks.  Since 2008 we have had the fallout from Liborgate, the PPI mis-selling scandal, and lately the record £28 million fine imposed on Lloyds TSB  for ‘serious failings’ around their staff bonus scheme, to name but a few.  Even the good old Co-operative Bank has fallen from grace. Previously a by-word for ethical banking, the Co-op has gone through its own crisis in recent months.  

First, following a massive annual loss in the year to December 2012, we saw its value plummet when it was downgraded to ‘junk’ status by ratings agency Moody’s.  Now it has been rocked by a sex-and-drugs scandal involving ex-chairman Paul Flowers, a Methodist minister.  How on earth did this character contrive to become a pillar of his local church, and then get put in charge of  a respected institution like the Co-op Bank?  You really couldn’t make it up! 
Rallying round to save the Building and Loan


Before this scandal blew up, I would have said that if ever there was a bank with the ideal public image for blazing a trail for ethical banking, setting high standards and implementing reforms, that was the Co-op. Now even that squeaky-clean reputation has  been tarnished.  Where do we go now to find a bank with high standards and decent moral principles? 

If ever the time was ripe for banks to work hard to regain the confidence of their customers and the respect of the media, it is now.  How could they achieve that? How about knuckling down and getting ready for Basel III ahead of schedule, for example?  By accepting the need for change, embracing Basel III, Volcker and the Vickers Report and implementing the new reforms early, banks could not only restore consumer confidence, but also equip their managers with vital tools for risk management, data control and and improved management reporting to enable them to work more efficiently. Let's do it! Let's be more like George Bailey and less like Mr Potter. Let's save the banks.









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