UK banking and banks in many other countries have been subjected to a great deal of scrutiny, reporting and criticism during the aftermath of the 2008 financial crisis. A raft of new regulations has been developed, like the new Basel 3 rules for supervising risk and prudential behaviour in international banks.
In the UK, the recent (2011) Vicker’s Commission has recommended the ‘ring-fencing’ of UK banks’ retail operations. This means that independently capitalised, ring-fenced banks will be exclusively allowed to provide certain services and their exposure to others will be prohibited. In his annual Mansion House speech this year (on June 14th), George Osborne is expected to commit the UK Government to implementing these proposals that will force banks to ring-fence (separate) their retail from other (especially investment banking) operations.
The UK Government appears committed to these tough reforms, although it has bowed to pressure from the banks to allow them to conduct a wider range of activities within the ring-fence. These include simple derivative products used to hedge small firms against currency and interest rate fluctuations. Consumers will also benefit as the new reforms should help to increase competition in the retail banking market.
These moves follow a complete overhaul of the UK system of bank regulation. A so-called ‘twin peaks’ system (introduced in April 2012) replaces the former FSA (Financial Services Authority) dominance of bank supervision. Under these reforms, a new PRA (Prudential Regulatory Authority), under the Bank of England, is responsible for the prudential regulation of significant financial firms (mainly banks and insurers). The new FCA (Financial Credit Authority) will oversee the conduct of business and market regulation of all financial firms (together with the prudential regulation of non-PRA firms).
The preceding are examples of the sweeping regulatory changes that followed the financial crisis. They will take many years to implement fully and their consequences (intended and otherwise) will take time to unfold.
But it is the attitudes, strategies and behaviour of bankers themselves (the folk running the business) that were also much criticized in the run-up to the crisis. Aggressive sales targets, short-term profit maximisation and apparently high bank bonuses were symptoms of a culture that often appeared inconsistent with customers’ and society’s needs. A strong ‘selling’ culture (cross-sell all that you can and meet targets at all costs) appeared to prevail over the more socially responsible and customer-focused ‘marketing’ approach (identifying and supplying needs-satisfying products to customers at a reasonable profit). The latter, strategic marketing approach appears more consistent with longer-term bank customer retention, greater customer satisfaction and contributing more strongly to higher economic welfare and sustainable growth.
Post-crisis criticism has focussed on the alleged reluctance of banks to lend to SMEs, especially smaller businesses and start-ups. (A recent blog in April 2012, discussed the proposals of the UK Breedon Report in this context). No amount of new regulations and controls by themselves can change fundamentally the way that bankers think and act. But there are signs that bankers are beginning to re-think their attitudes and policies. Another driver of this apparent reforming process is that bank customers and shareholders are beginning to assert themselves much more strongly.
Omar Ali (Head of UK Banking and Capital Markets at Ernst and Young) reported recently (April) at the Scottish Institute of Banker’s Annual Dinner in Glasgow that customers are increasingly taking control of their banking relationships. Ernst and Young has recently undertaken its third annual survey of around 28,500 retail banking customers in 34 countries (www.ey.com/globalconsumerbankingsurvey).
Some select findings of this survey include:
- Confidence in banks continues to deteriorate.
- 40 per cent of UK customers have changed their bank in the last year.
- Multi-banking (using several banks, instead of one) is increasing and appears here to stay.
- Low trust is encouraging customers to turn away from traditional sources of advice (like banks).
- Customers are increasingly willing to consider and transact with new financial services providers.
Customers, then, are responding more strongly and consistently to alleged low service levels.
The Financial Times (June 14) had a special feature on ‘Sustainable Banking and Finance’. Although skepticism remains (indeed, abounds) about banking promises, there are some tangible signs that financial institutions are beginning to view their responsibilities more seriously. They find ‘encouraging signs that the world’s financial services companies…are reforming themselves’. They cite the UK’s Barclays putting ‘citizenship’ at the heart of its public image. Evidence (albeit anecdotal) also appears to find support that investor complaints are influencing bank remuneration committees.
Bank lending to smaller businesses remains a big issue. With tighter bank regulations, bank lending is more expensive and demand for bank loans appears correspondingly more muted at these higher cost levels. Short-term lenders (like Wonga) have moved into small business lending (although bankers criticize the high cost, short-term focus of this kind of lending to ‘plug gaps’). In the UK and other countries (like Germany, China and the US), another new development has been ‘peer-to-peer’ lending that facilitates individual savers supplying funds to small firms.
Although it is still early days, a new banking ethos appears to be developing in the face of sustained post-crisis criticism, new regulations, and intensifying customer and investor pressures on banks to reform. This is surely a positive development and is much needed to help restore and sustain global economic recovery. Let us hope that the continuing eurozone crisis does not slow down this apparent outbreak of banking reforms.
Professor Ted Gardener