Why breaking up banks could be good for bank ethics

News that J.P.Morgan Chase is calculating the costs and benefits of breaking itself up has little to doJ.P. Morgan2 with bank ethics.

Yet better ethical behaviour could be one of the real gains from such an action, which is also apparently being considered in regulatory circles for other big banks too. [1]

Attempts to change bank culture in the last few years has been a patchy story with little credibility. Endless fines and exposures of dubious practices have continued relentlessly–often to the despair of bankers themselves. What if anything can transform the situation?

One answer might be called the Richard Branson solution. Millionaire Branson lives by the philosophy of smaller is usually better—apart from airlines and railways of course. His approach is that once you get more than a certain number of people in a company it loses not only its dynamism but it’s original culture begins to fray at the edges.

In Branson’s case, smaller means around 50 employees, though you could probably find quite a few exceptions in his patchwork business empire. Still, the idea of small is better seems sensible when it comes to leadership ethics.

It is easier to be ethical when you are dealing with a narrow remit. When your service offering stretches in many directions there are bound to be difficult moral choices coming at you almost daily.

bob diamondAn example of this happening was the unfortunate Bob Diamond, who made all his personal loot from the riskier side of investment banking. In a mad, perhaps inebriated moment he took on the rest of Barclays operations. Soon he was mired in controversy as his narrow personal ethical stance came into conflict with what a conventional retail bank is all about, namely trust.

Put simply not enough people trusted Diamond to run the diverse Barclays’ retail and investment operations. As the new leader some of his comments did little to reassure them. In 2011 for example he virtually said “drop dead “ to the UK Treasury select committee. Not quite those words, but the substance was every bit as uncooperative. [2]

He went on to suggest amongst other unacceptable assertions: “The biggest issue is putting the blame game behind us. The time for remorse is over.” And while he would “show any restraint possible” on bonuses, he would not commit to waiving his own personal award, as he and rival bank chief executives did earlier.

That went down like the proverbial lead balloon and the rest is a story of how when the establishment turns against you, your best step is to move on fast—preferably abroad.

Andrew Haldane of the Bank of England did the maths about why the large scale banks are still a disaster waiting to happen. In a March 2010 paper he calculated the world-wide costs generated by the banks’ activities and suggested they could add up to five times the world’s annual GDP— that’s trillions in whatever currency you care to name.

Trillions by the way, exceeds the number of stars in the Galaxy, which should be enough for anyone.

stars

Assuming a financial crisis every couple of decades, protecting us from the disaster would need a levy on the existing banks of so many billions it simply wouldn’t work.

No single bank could cope with its share of the bill. And no amount of culture change, codes, and training will resolve the basic fact—big means ethical dilemmas and dubious behaviour on a global scale.

Smaller could mean more manageable entities; leaders could expect to ‘get their arms around the trees’. Running a smaller bank would make setting and pursuing a viable ethical tone easier.

More than four years after the 2008 financial crisis, a report from Rasmussen showed 50% of US adults favoured breaking up the big banks, while 27% were undecided.

So far, regulators have shown little appetite for such radical change, despite assertions to the contrary. There always seems to be “something big” in the works like break ups coming along to affect bank ethics, yet somehow nothing of substance actually happens.

Rather than go for smaller, potentially more ethical banks, the preference of regulators has so far been to ring-fence separate different activities from each other. Whether this will make a fundamental difference to the risks the banking system imposes on the rest of us remains doubtful.

Divided and rule

Breaking up of big commercial entities goes right back to 1911 when the US supreme court found Standard Oil as damaging national interests. It ordered the dismemberment of this giant entity and since then “break up” remains a viable tool for regulators and courts.

For example “It’s Time to Break Up AT&T, Verizon, Comcast, Time Warner and the Rest of the Telecoms” shouted a headline in 2011. It argued telecoms provided overpriced and inferior service, and were systematically overcharging the hapless American consumer.

Demands to break up the 21st Century banks are therefore nothing new and the only real issue is will regulators have the courage to actually go down this route or not? So far the answer must be “don’t hold your breath.”

Arguments against break ups are many, and the Standard Oil experience shows why. After that empire was broken into over 30 separate entities founder Rockefeller became even richer. And this may well be the calculation of Morgan Chase as it considers not waiting for regulators to do the dirty work, and instead do it for itself.

Still, it would be far easier to instil better bank ethics on the fragments of Morgan Chase than on the whole bank, with its complex structure and hard to understand links and connections, opening up countless opportunities for unethical practices.

The large scale banks like Morgan Chase have been compared to vampires of legend, sucking instake resources, delivering over-priced services and being more concerned with personal profits than giving value for money. Only a stake in the heart of a vampire supposedly kills it.

The break up of banks could be that stake.
  1. Gapper, Regulators are right to cut the biggest banks down to size, FT, 7th Jan 2015
  2. 2 Yves Smith, Barclays’ Bob Diamond to Non-Bankers: Drop Dead, Naked Capitalism, January 12, 2011

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