The Good Bank is an Economist Intelligence Unit research programme sponsored by Credit Suisse, Mazars and SAP and supported by Capgemini. This programme brought together dozens of experts to discuss the best ways to improve banking and what that would mean to a wider variety of stakeholders. It was fuelled by an online debate and culminated in a live webcast that is available globally. This was informed by contributions from the online forum, desk research and further in-depth interviews with banking executives and industry experts. This report was written by Dan Armstrong and edited by Brian Gardner.
Our sincere thanks are due to all who contributed their time and insights to this project.
The webcast debates, articles and discussion can be found here: http://event.wavecastpro.com/thegoodbanklive/
Key findings
Five years ago, Lehman Brothers entered history as the largest bankruptcy ever. The financial crisis that followed triggered the most severe economic downturn in decades. A widespread sense of injustice flourished in response to government bailouts of the banking industry. The loss of confidence in the financial sector extends beyond fringe groups or left-wing academics to include many who had previously been the industry’s staunchest defenders. This has led both to more stringent regulation and to the recognition that the banking system requires wholesale re-examination.
Accordingly The Economist Group brought together experts in financial services through an online platform and a live discussion in London to address this critical question: What does it take to be a Good Bank? Is it possible to earn back the public’s trust? How can banks provide the credit that economies need to grow while satisfying shareholders, regulators and protecting depositors? What is needed to embrace prudence, efficiency and ride the wave of technological innovations spreading through the rest of the economy?
Asking banks to change is a daunting task, but in the last five years much has been done to shift from crisis towards a more stable future. This work is hardly completed but the forum convened via The Economist Group was not intended to provide a blueprint. Instead, it was meant to provoke debate and discover common ground. The pillars that we investigated at the heart of a good bank are trustworthiness, efficiency and innovation. We employed panel discussions and over a dozen additional interviews with banking experts, regulators, financial services executives, innovators and advisors.
This revealed that while discord certainly exists, there is also a surprising amount of consensus. One significant area of disagreement is how banks can best serve the “real” or non-financial economy. Is it by sticking to traditional activities such as deposits, payments and lending? Or do liquid markets and price discovery require large trading books in foreign exchange and derivatives? A useful distinction exists between global banks that make markets, and national or local banks that primarily take deposits and make loans. The former require more thorough and coordinated oversight, given their central role in the global financial system.
Agreement exists on the need for banks to maintain profitability while downplaying the metric of return on equity, too often fuelled through leverage. In fact, there is a consensus that the days of 25% returns on equity are over. According to the consulting firm, McKinsey, the global average return on equity is at one-half of its pre-crisis peak— a healthy development, argued several of the contributing experts. There is general agreement that banks need to focus on clarity and operational excellence in order to reduce costs and become more agile in providing new services. Furthermore, certain investments in social, mobile and analytics hold the promise of new business models and personalised customer offerings. Those banks that do not embrace new innovations may lose out to new market entrants willing to do so.
It is clear that chief risk officers have more authority, better models and are focusing on risks that had previously received little attention. Capital buffers are more robust and boards have worked to strengthen their oversight. Yet this scenario has happened before and it is not clear that banks can fully escape a bubble- to-crash credit cycle that both mirrors and intensifies business cycles.
It is telling that not a single interviewee was willing to defend the status quo. The extent of transformation demanded varies significantly but all participants recognise the need for change. This highlights the most problematic quality required of a good bank: the trust of a still sceptical public. To trust any brand, it must be authentic, clear, and represent values that its customers share. While rancour over bailouts lingers, banks need to do more than apologise for past mistakes and
reform their governance. They need to act in the best interests of their customer and be seen to do so. Old sins are not forgotten, but they can be forgiven if banks help drive to a return to growth and prosperity while prudently managing their risks.
