This is not a banking crisis.
But banks may soon find themselves under similar levels of scrutiny as during 2008/9 – and subject to a similar regulatory backlash – if their behaviour during the current crisis once again fails to fulfil the expectations of policy makers and wider society.
In the UK and elsewhere, private sector banks are being relied upon to administer many of the various financial support measures backed by the Government, including emergency loans.
However, there is some evidence that banks are becoming a bottleneck - preventing the funds reaching the companies that need them as a matter of urgency. Because the UK Government is only guaranteeing 80% of these loans, the banks still feel exposed to the credit risk inherent in lending to vulnerable entities. As a result, they are demanding personal guarantees or other significant security from company directors or simply turning down loan applications.
Furthermore, on Thursday 26th March, the UK regulatory authorities (in a joint statement from the FCA, FRC, and PRA) warned banks that they should not try to overstate credit losses in their bad debt provisions – as this would reduce their capacity to lend on the required scale.
During the banking crisis of 2008, Barclays and other banks went to great lengths to ensure that they did not require government support – largely so that they could retain freedom of action over key business decisions. But ultimately the behaviour of the entire sector was viewed so negatively that it was subject to a huge amount of regulatory control which effectively turned banking into a compliance-driven activity.
Today, the sector must wake up to the prospect of a similar regulatory backlash if banks do not deliver for society during the current crisis.
For example, if banks continue to pay large dividends and significant discretionary bonuses while at the same time failing to help sustain the survival of their SME clients, the consequences from a reputational perspective could be dire.
From society’s point of view, banks should retain as much of their earnings as possible in order to increase their capital buffers – which underpin their ability to lend. If only for symbolic reasons, senior executives at major banks would be well advised to place a moratorium on their long-term incentive plans and performance-related compensation arrangements, and focus on demonstrating a measure of solidarity with their customers and their wider workforce.
The banks cannot afford to have a second bad crisis. Banking governance – and particularly the banks’ non-executive directors – must recognise the clear and present danger to the sector, and use this crisis as an opportunity to transform banks into respected corporate citizens rather than the perennial corporate villain.
Roger Barker, Head of Corporate Governance
Roger previously served as the IoD’s Director of Corporate Governance and Professional Standards between 2008 and 2016. He is a UK Member of the European Economic and Social Committee (the EU advisory body), Honorary Associate at the Centre for Ethics and Law at University College London and a visiting lecturer at Saïd Business School, Oxford, and Cass Business School, London.
Roger is the holder of a doctorate from Oxford University and the author of numerous books and articles on corporate governance and board effectiveness, including: ‘Corporate Governance and Investment Management: The Promises and Limitations of the New Financial Economy’ (Edward Elgar, 2017), ‘The Effective Board: Building Individual and Board Success’ (Kogan Page, 2010), and ‘Corporate Governance, Competition, and Political Parties: Explaining Corporate Governance Change in Europe’ (Oxford University Press, 2010). A former investment banker, Dr. Barker spent almost 15 years in a variety of equity research and senior management roles at UBS and Bank Vontobel, both in the UK and Switzerland.