International banker Ian Rainey has enjoyed a highly successful and dynamic career which has taken him around the globe. Now back in his native Northern Ireland as managing director of MSL Search and Selection in Belfast, he continues his series on the world of banking
Banks corrupt the people who work for them or so the Church of England has claimed. In a scathing assessment it calls for a debate on whether, far from dealing with a few ‘bad apples’ in the banking industry, the ‘whole orchard needs replanting’. In light of the various scandals which have hit the market in the last few years one can understand the Church’s concern. When one looks at the sub-prime mortgage crisis in the U.S. which almost single handedly brought the world’s banking sector to its knees and the Irish Banking crisis fuelled by overly aggressive lending to the property market and the more recent Libor interest rate fixing scandal in the UK, it is hard to defend the banks.
However having been a member of the banking profession for some twenty years in various parts of the world I feel moved to defend my colleagues or at least some of them and try to differentiate between those types of banking where there is a propensity to take excessive risk for very high rewards, from what is the more traditional banking as we know it. Here I am referring to the retail banking sector where we all bank our salary cheques and in turn apply for mortgages and standard business loans.
Having worked in banking across the world in South Africa, USA, the Philippines, England and at various times held board appointments in Hong Kong, Singapore, Bangkok, Sydney, London and Dublin I believe I have had the chance to view the industry and its participants in many different scenarios. My current role in Executive Recruitment also requires me to keep very close to the industry as I recruit top bankers for the local banks in the province
I have to be very careful not to tar the Investment Bankers with the ‘evil’ classification, because that is the area where I have had the least of my work experience. However my opinions are influenced by the fact that the risks being taken on paper appear to be excessive and in many cases are being undertaken in the Investment or Merchant Banking subsidiaries (the casino side) of some of the world’s largest retail banks such as Barclays, Citibank, J.P. Morgan, HSBC, Chartered Bank and Deutsche Bank. These are the very institutions where individuals also deposit their salary cheques and expect the Regulatory Authorities to protect their monies. Paul Volcker, probably the most respected Governor of the U.S Federal Reserve in recent history, has called for the ‘ring fencing’ of the Investment part of these Banks and to keep them completely separate from those parts of the Bank which take in ‘old ladies deposits’. This I would strongly support but unfortunately the Vickers Commission in the UK has been less than willing to support Volcker’s proposals.
We recently had the case in London of a former Swiss bank trader facing fraud and false accounting charges amounting to $2.3 Billion for his irregular trading activities. Probably better known in Ireland is the case of Nick Leeson whose derivatives trading in 1995, while he was employed by Hambros Bank in Singapore, was such as to bring down one of Britain’s oldest and most prestigious Merchant Banks. Essentially Leeson was betting on the upward movement of the Japanese Stock Exchange when unfortunately for him the Kobe earthquake put the Nikkei Stock Index into a downward spiral and created a loss of $1.4 Billion for Barings, which the bank was unable to recover from.
The derivatives market in the days of Leeson was no more than a small but irritable pimple on the trading portfolio of the worlds Merchant Banks. Today that market has grown to $1.2 Quadrillion dollars (and I don’t think I have ever written the word Quadrillion before). This figure is almost twenty times the world’s total GNP which today stands at $69.6 trillion dollars. In short there is an excessive amount of trading going on in the proprietary market. Proprietary trading occurs when a firm or bank trades stocks, bonds, currencies, commodities, their derivatives or other financial instruments, with the firm’s own money as opposed to that of its customers (or ‘depositors’), so as to make a profit for itself. That causes me to be concerned when I see that the price of commodities such as oil continues to rise at a time when industrial demand around the world for goods and services is in steep decline. Is it any wonder that Warren Buffett, probably the world’s most successful investor, refers to derivatives as ‘financial weapons of mass destruction’?
But it was not the failure of the investment banks which caused the demise of the Irish Banking sector. Neither was it driven by the greed of its lending bankers chasing excessive bonuses and burgeoning salaries. Rather it was driven by two major factors: One - greed in the Boardroom where there was an egotistical drive for earnings per share and an unrealistic desire to see Ireland on a par with the more developed economies of the world and two - an almost total absence of Regulation from the Central Bank or the Ministry of Finance.
I firmly believe that Ireland has been left with a much better informed and educated banking sector probably best characterised by the aphorism ‘there are non so virginal as the spoiled whore’. Ireland has been blessed in that it has, with the help of the Central Bank, weeded out the worst and has in place some of the best trained retail bankers in the world. The lesson was painful but the replanting has been done and without any help from the Church.