Relevance of traditional precepts and principles in banking

I believe I’ve been very fortunate to have “enjoyed” my 60 years in the commercial banking business from an apprentice through to chief executive and on to non-executive director, currently.  One has seen many many changes, but I wonder if the fundamentals have remained much the same?Mind you, when I first started, anyone could open a savings account but you were required to have an introduction from another current account holder before they would allow you to have a cheque book!  Great emphasis was placed on the responsibility of how to use cheques and indeed how to take care of them. The emphasis was very much on confidentiality, security and absolutely ethical behaviour.  Personal lending was all by way of an overdraft; there were no personal loans, credit cards, mortgages etc.!  Unauthorised overdrafts were dealt with punitively!  Lending to businesses irrespective of size was very much down to the judgement of individual branch managers and was very much “belt and braces”!  In other words, a “standard security”, otherwise known as a “floating charge”, was taken over all the assets of the company. Some working capital by way of overdraft might also be included.   When overdraft facilities were granted to individuals, they were accompanied by a long lecture on the fact that they had to be regularly reduced/repaid and should not become “stagnant”. The wisdom of borrowing was gone into in-depth by the bank manager who would satisfy himself as to the individual’s capacity for repayment. When one looks at the staff of banks in those days they were very largely male and indeed in some banks if women got married they actually had to retire! The system was very hierarchical and the manager was like “God”!  As mentioned above, junior staff were “apprentices” and paid accordingly until they had passed four years of institute exams.  The focus was on basic training and examples of good behaviour shown by more senior members of the staff; promotion in most cases came as individuals retired, although there were some notable exceptions to this, however. Staff were all very well trained and competent and, almost without exception, understood ethics and honesty!When we look at the environment today, where some of these principles continue to prevail, there is no doubt that the trend from the very late 90’s up until the financial crisis in 2009 and even up to the present day, has been for investment banking and commercial banking co-mingled. This has resulted in very negative changes in ethics and good behaviour driven by a corporate banking culture, which is so different from the traditional, ethical, conservative commercial banking culture.  Indeed in this brave new world “ordinary commercial bankers” are generally not rated by the investment banking types that run so many banks today. The mass market has arrived in the last 25 years, particularly with a proliferation of products and great pressure on front line staff to “sell”.  The essence, in my view, of selling bank products is that one should “never knowingly sell a product to a customer who does not need it”!  This has been totally disregarded in the last 20 years and we have seen vast claims and fines in respect of PPI mis-selling and others.Is there a way back I wonder?  Really short of regulators legislating for the total legal separation of investment and commercial banking, I don’t think there’s much hope of that happening. There are of course some new “challenger banks” in the UK who are focusing on some of the more traditional precepts and principles and they do appear to be quite successful!Finally, one of the biggest changes in bank balance sheets is “leverage” i.e. the percentage of one’s customer deposits that one can lend out.  It’s not uncommon for many banks to be over 80-90% lent, compared with the 40% lent regulations that prevailed when I started.  It is, however, interesting to note that the bank on whose board I serve is less than 40% lent and manages to produce a return on capital that is the envy of the industry – it is possible!Clearly, we’ll watch this space with interest and see what develops.* Glasgow-based John R Wright is an academic, veteran banker and a former CEO of Oman International Bank and Gulf Bank, Kuwait.