[The need for European banks to comply with the requirements imposed by banking supervisors does not exclude the possibility of strategies with a social impact aimed at the creation of value for shareholders and savers: for this, we need enlightened supervisors and imaginative bankers]
Is there still room for a madeleine of Proustian memory among the “fast-food flavorings” of the modern bank? Or is the soul of this Europe, as Jacques Delors has evoked, condemned to breathe the ephemeral fumes of a banking system incapable of visions oriented towards social cohesion and sustainable growth, at the foundation of the European project?
The unconfessed nostalgia for the “golden age”, in which the interest margins ensured comfortable returns to the shareholders, generous credit to clients, market stability, seems to everyone to be a vain hope even more diminished by the urgency for reparations. The sweet taste of the past blends itself, inexorably, with the new scent of Europe, which seems to impose pré-à-porter solutions, even for the management of banking crises, which are largely dissociated from the economic and social cohesion policies of today, and at the root, are also in contrast with the same banking sustainability. Is it all here? Is it the sunset on the Western bank, or the overture to a new dawn from the aroma of the East?
A primary key to the reading of modern facts lies in the combination of vigilant actions and market strengths. If the unique mechanism of vigilance aims to restore European banks (“Occidentalis Banca”), reassuring sustainability parameters, then market pressure will cause bankers to make painful seemingly inalienable choices that are not always worthy of value creation, or aligned with goals. As recalled by Carmelo Barbagallo – Head of the Banking Supervision at the Bank of Italy – in his discourse on Banks and the Market: New Challenges for Operators and Institutions “Market and supervisory impulses require increased efficiency , and contained administrative and personnel expenditures, a more rational territorial presence” [http://www.bancaditalia.it/media/notizia/carmelo-barbagallo-intervento-su-banche-e-mercato-nuove-sfide-per-operatori-e-istituzionicom.dotmarketing.htmlpage.language=102&pk_campaign=EmailAlertBdi&pk_kwd=it].
The bank prisoner
The still-programmatic effects of surveillance and market pressure (including media) are beginning to be noticeable in medium-term strategic plans of intermediaries and operational plans for managing non-performing loans (NPLs) predisposed by banks and sent to the BCE. New vigilance, and same solutions, would seem impossible to free themselves from the compulsion to repeat a déjà vu connoted by three imperative mantras: (i) rationalization of branches; (ii) rationalization of staff; (iii) streamlining the non-performing loan portfolio.
We must hope that the theoretical intention does not translate into substantial actions, whose more immediate interpretative reading suggests replacing “rationalization” with “reduction”. In fact, it would be counterproductive that the “therapy” proposed by the supervisors induced the banking system to indiscriminate territorial network sizing, disaggregated by layoffs or facilitating staff exit, to a hasty sale of non-performing loans. Banks are born and prosper together with their customers, staff, and the area they support. Rationalizing territorial presence where this is already reduced, as in South Italy [see: http://www.bancaditalia.it/pubblicazioni/banche-istfin/index.html?com.dotmarketing.htmlpage.language=102], traveling with the engine of credits in the crowd, reducing the volumes sold or feeding them only through a degraded version of the “originate to distribute” model, is not aligned with the most intimate mission of banks, which should, on the contrary, stimulate the savings market, fund sustainable growth, promote financial and social inclusion. [In this regard, my article “You make credit or you die” https://www.goodinfinance.com/si-credito-si-muore/].
The missing bank
Rationalization of the territorial network and staff goes hand in hand and is, at this time, funded by cost containment and an innovative banking model, geared to online banking, use of external staff (agents and brokers in the first place), outsource of products and processes. Everything is perfect in the light of modernity.
It may be useful to remember the “lost time”, to enjoy a madeleine that, without nostalgia, recalls to our senses the “scent of the bank”.
Recalling the territorial division – even in modern times – there remains a wealth in terms of customer relationship, listening to local accounts, and product placement void of an adverse selection of customers. The only communication – even the web-native – without the “support” that the internal staff can provide to the customer, is not enough to characterize a brand loyalty, as well as to give return signals that can guide and urge adhering to the economic context.Even bad loan management can be evaluated by exploring old bankers’ recipes: another madeleine, which helps us to consider with greater clarity, on the one hand the need to clean up the loan portfolio and improve the capital requirements required by Basel rules, on the other, the possible medium term effects on value creation. The transfer of NPLs to external parties, very fashionable and evoked by several parties, affects, firstly, the relationship with customers (element not yet considered), and secondly, to the income statement of the transferring banks and the distribution of wealth. In the first case, there is a risk of consolidating a perverse model of the “originate to distribute” model: the bank grants loans to subsequently sell the NPL ones to the market , thereby exposing a moral hazard attitude that facilitates credit offer choices excessively unjustified [a recent Bank of Italy study confirms the positive relationship between the weakness of the bank-customer relationship and moral hazard [i]. In the second case, the uncertainty about the recovery rate and the downward pressure on the sale price – motivated by the urgency of clearing the balance sheet – are more than sufficient to assume a transfer of value outside the transferor bank, resulting in losses for shareholders and savers, and distortionary effects on the distribution of wealth. Barbagallo himself mentioned in the aforementioned discourse the likelihood of the disposal of NPLs assessed by “approximation”, classifying them as symptoms of “market failure which increases procyclicality, complicates the work of the supervisory authority, and hampers overcoming the company’s difficulties.”
The recovered bank
It is good that a modern banker tries to read the evolving dynamics of financial markets and tries to rethink the processes of value creation of the banking business. It is right that the supervisors orient the banks in this direction. Yet, this action must be accompanied by a profound, pre-requisite and necessary reflection on the possibility of alternative choices to the simple and exaggerated “rationalization-reduction”.
Yet another madeleine, and we find that converting network and staff to innovative features is possible. The platform recently promoted by UBI Banca, dedicated to corporate welfare [https://www.ubibanca.com/ubi-welfare], is a good example of how to combine modernity (web platform), innovative services (advice and financial services for corporate welfare to corporate clients) safeguarding jobs (training and conversion of internal staff to dedicate to the new service ), and network enhancement (used as a promotion channel and direct customer support). In the same direction, the Creval project, aims to create an area of digital collaboration between the bank and its customers, where the traditional branch office and the new technologies related to the use of tablets and smartphones coexist and interact according to the operation required by customer.
Breathing the “bank scent” can be helpful in convincing yourself that an NPL management that combines the immediate need to clean the budget with the broader value creation is possible. In this regard, some intermediaries begin to assess NPL internal management solutions as priority. A significant example, in this sense, comes from the asset strategy template approved by the Board of Intesa San Paolo. There are also good choices like Banca Carige’s, to evaluate “hybrid” strategies for the recovery of bad loans other than pure transfer: in this case, the set up of an ad hoc vehicle outside the bank’s perimeter can represent a solution that must, however, find a balance between budgetary needs and the protection of internal staff dedicated to the new function. We need some last efforts from bankers; we need them to interact with “authority”, and with the “supervisory authorities”. In the absence of strategies, such as those mentioned above, which are innovative and proactive in relation to supervisory requirements, the urgency of “putting the accounts in place ” to meet the prudential requirements can cause banks to weaken the relationship with their customers, disallow the protection of employment levels, and transfer part of the value of their credit portfolio to external entities. Ultimately, reducing the level of intermediated funds and destroying value in favor of potential new competitors: the exact opposite of their natural mission and the good intentions of the same supervisors.
The guidelines for NPLs management published by the BCE confirm the authorities’ awareness of the dangers of rushing solutions, and ask banks to evaluate a mix of alternative strategies in relation to the different degrees of NPLs in the portfolio.
Experienced managers should have arrows in their bow to get out of the traditional clichés that, over and over again, over the years have inspired old fashioned management practices and depressive economic effects. There is no need for sophisticated minds, asking for huge compensation, to shut down branches, to dismiss employees, and to transfer to the market the management of bad banks, created or inherited. An honest liquidator could do more, at less pretentious fees.
It is equally true that supervisors, on the other hand, should – in their daily interaction with the institutions involved – guide the restructuring processes in a timely manner of medium to long-term strategies without exasperating vigilance in favor of urgent measures, and by disenfranchising the media pressure that accompanies the market forces. This applies to the stability of individual intermediaries and the entire credit market.
In times of crisis, a virtuous path of banking requires illuminated and vigilant people – certain, but also patient – and “imaginative bankers”. In my article ” Steps to an Ecology of a Banker” [https://goodinfinance.com/ecologia-del-banchiere/], recalling the distinction between ” scientists economist ” and “imaginative economists” – proposed by Nobel Prize winner James Buchanan in his work “A Compass for Economic Science” – I extended the same metaphor for bankers: those “scientists”, like scientists , assume the factors such as dates and constants, as natural laws; the “imaginative bankers” mix the pieces and exercise the freedom of the imagination.
These are bankers who, from the pages of this blog, we promote and support. These imaginative bankers are entrusted with something more than a madeleine: the ecology of finance and, ultimately, of Europe, which is still a “Book to Come” today.
[i] Albertazzi U., Bottero M., Gambacorta L., Ongena S., Asymmetric Information and the Securitization of SME Loans, Working Paper N° 1091, Banca d’Italia, dicembre 2016 (https://www.bancaditalia.it/pubblicazioni/temi-discussione/2016/2016-1091/index.html?com.dotmarketing.htmlpage.language=1)
Good or Bad?
Examples of banks and enlightened bankers are emerging that try to combine respect for the requirements of supervisors with innovative business models that focus on the social dimension and sustainable growth.
The media pressure and the market forces, together with the urgency for solutions sought-after by supervisors, can induce banks to rush to make choices that are disassociated from the medium-term goals and the creation of value over time.