I doubt we’ll ever have a repeat of the banking crisis of 2008 (once bitten), but there may well be more bank failures before this current batch is done. There have already been some fairly large, grown-up banks that have had the confidence of their depositors eroded to the extent that liquidity becomes a problem.
So far this has led to opportunities for even bigger banks to swallow them up without having to pay a premium to net asset values, because goodwill has evaporated. In fact, discounts to face value are the order of the day. Nice work if you can get it, for the already big (too big?) players.
These rescues present the cheapest client acquisition opportunities around. Value drivers have changed in the new digital era and client data is fertile ground to mine, way beyond the opportunity to just lend risk money at a margin. All of this at no real cost at the margin — you get the new client base by simply offering them a safe(r) place to store their money (mattresses and couches just don’t cut it nowadays).
Systemic risk must obviously be avoided at all cost, but regulators have morphed into dealmakers and brokers now, essentially sidestepping the risk they would otherwise have to take on themselves. Confidence is restored without any effect on the central bank balance sheet. There is a limit to how long this game can be played.
Banks fail principally because of failed or mispriced risk management. Bankers, however conservative in their bones, are not entirely immune to greed and opportunity. In good old-fashioned lending, you either get your loan serviced and repaid, or not. Incentive schemes drive volume of business in the absence of upside participation in the outcome.
Bankers get tempted to start lending to the tails of the risk-return efficiency curve (the normal distribution curve of aggregate loan risk, if you will), where other capital providers should play, only to find that it is not within their skill sets (or even their DNA) to do so, or take on single counterparty risk beyond prudent levels.
But perhaps the reason central banks and regulators are stepping in to deals (remarkably quickly — in a matter of days, it seems) is because they created the incentive for reckless lending in the first place: easy money.
At some point quantitative easing was bound to require quantitative tightening. The trouble is that it is easier to hand out sweeties than to administer medicine. It’s not the corrective rising interest rates that are the problem, it’s the easy money that led up to it. Fidelity Bank was apparently handing out bigger and bigger mortgages (footnote: never extend credit to the rich).
While consolidation in the banking sector may help the regulators sleep at night, it can’t be driving a healthy, competitive pricing of money. There may be enough surviving competition and global spread for what’s happening to be no more than a bump in the road in the top economies such as the US, Japan and Europe as a whole, but in a society as economically unequal as ours we don’t need more consolidation (concentration?) in the banking sector.
We need more competition and innovation, but we still need the rules that govern sustainable credit to prevail. It’s a tough (but necessary) bridge to cross. As things stand, access to credit for the unbanked comes at a price that is anything but an enabler of growth.
Solving inequality will require blended sources of capital to come to the table. For that to happen in sufficient quantities the socioeconomic outlook for the country will have to improve dramatically. But whatever happens along that journey, banks must stay in their lane, and not find themselves tempted to take risks they’re not equipped to manage.
Managing the arc of the pendulum of banking over- or underexposure (after the fact) is a fairly blunt tool. A more sophisticated, agile capital allocation model and risk oversight is long overdue.
• Barnes is an investment banker with more than 35 years’ experience in various capacities in the financial sector.
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