Column Otbert de Jong

The recent credit crisis must have dramatically changed the public perception of banks. The big question now is whether the public is also going to act on this new perception. Will they demand a changed attitude and behaviour of their banks or are they too passive to vote with their feet and change their financial arrangements.

To a certain extent clients of banks were of course themselves just as greedy as the bankers, chasing yield and return as hard as they could, ignoring risk and ethics as long as the returns would come in. Some would even give their money to people they would meet at the tennis club as long as returns would be handsome. No questions asked.

So how high will the principles of banking Holland be and how big the need for a new way of banking? And how about the banks? Will they really change their stripes and do they anticipate a changed attitude and vigilance of their clients? Or will they just re-spray some of their old products and effectively continue business as usual?

Really changed?
Some banks have started to change their marketing campaigns, telling people they are clean, or green, or lean and mean. Are they? Or is this just more of the same old money making machine?

There is thus far little evidence that they have really changed their way of working. One can not totally blame them because that kind of change can not be realised overnight. For a start, there are typically still the same people in charge, same culture, same old same old. Change has to start at the top. So the leaders of banks now have a really big responsibility. Where before, they could claim ignorance, they definitely can not anymore. So what are they going to do?

We know for sure they will have to start cutting costs. Banks are still suffering from the recession. Business volumes in almost every sector are down. Costs of funding are high and interest rates low. Regulations on liquidity, risk and solvency are more onerous than before. As a result, banking will become a lot more expensive for banking customers. The only way to avoid these costs becoming excessive is to really simplify the operations of a bank.

Most of the costs in banking are related to administration, risk management, compliance, reporting, regulation, management information, infrastructure and management. Every euro you put in the bank needs to be booked, reported on to you and regulators, risk managed, comply with regulation (like anti-money laundering), invested (so that the bank gets interest on it from borrowers) and be held for you to withdraw and so on.

We have put a lot of tasks on the banks and have conveniently forgotten that all of these need a lot of effort and cost a lot of money! Not paying for this leaves the banks with the tab. The only way they can afford paying that tab is either by taking big punts or by developing super scale, which is a massive risk in itself as we have experienced in recent months.

Smaller
So time for sanity to return. Banks need to become simpler, should be allowed by us to charge us fairly for their services, should be kept small, should be allowed to fail if they are no good. If we pay our bank a decent, reasonable fee, it will not need to be big or bulky and take big risks, so we can then rest assured it also will not easily fall over.

Smaller simpler banks can be closer to their clients and also serve their clients better. Every bank can focus on the needs of very specific client groups, very specific products or a cross section of these. These target groups can be small or large. It does not matter as long as there is something that makes them want different treatment. Gay-, black-, female-, Islamic-, business-, mother-, yuppie-banking, it is just a small sample of the infinite number of communities or tribes that one can think of in this respect.

Costs increase exponentially with complexity. So these smaller banks need to guard against complexity in order not to be forced into scale or elevated risk. The regulator also could help by developing a relaxed ‘light’ framework of regulations for these banks to work by or consider different levels of banking licences depending on the type and scale of products that these smaller banks sell.

I look forward to opening my account with a new bank for passionate advisors and consultants.

Otbert de Jong is advisor for the banking sector.