What Special Responsibilities Does a Large Bank Have?

In the last two weeks the blog and comments have clearly illustrated a business and political (as relates to banking) point of view. In doing so, there has been focus on problems. Moving forward, there will still be focus on solutions as they relate to the industry and regulatory debates that are ongoing. But, we must also offer an alternative view of what a bank could be.

In the next few days we will explore the special responsibilities a large bank has, and what responsibilities any bank has. Of course, this is opinion and some will find it too idealistic. However, when the ideals are lost, the policy is not far behind.

So here goes. I would argue that there are unique responsibilities of large banks that start with safety and soundness as a prerequisite. Betting the bank is profoundly anti-social. The position of the large bank must be understood as something akin to the Kidneys in the body. They are essential. Every smaller bank has a larger bank that serves in various ways to allow it to conduct business. Many of these relate to the processing of back office functions, clearing transactions, technology platforms, the ability to invest their surplus funds, access to liquidity through overnight loans, and dozens of other potential functions. Second, sometimes the largest banks are Trustees, Custodians, Bullion holders, Fiduciaries, 401K Plan or Pension Plan Administrators, etc. So, I would argue the the largest institutions have a responsibility as very protectors of the Free Enterprise system which has been bequeathed to all of us. If they do not protect it, they subject it to risk or ill health. As discussed in 13 Bankers for historical context and elsewhere, this responsibility has been abridged time and time again. There is a magnified effect of any such breach with the largest banks.

Further, the largest banks have responsibilities as role models for the entire system. The truth is they provide a talent pool to the industry, as well as providing operating models to the industry. It is the shame of some regional and community banks that they have accepted and used this talent pool and these methods indescrimanently and have adopted some disfunctional models to the harm of their own organizations. Other institutions tend to think the largest are also the smartest in risk managment and creating profit. Why shouldn’t they think that, up until now? Some believe that if they emulate processes, such as sales management and incentive processes, they will replicate results on the plus side while still retaining some of their individual distinctives to finally surpass the performance by various measures. Maybe they can even acquire and become the next large bank. In fact, what often happens is that they adopt what, unbeknownst, to them are the worst excesses of the largest.

Further, the large bank has the responsibility to occupy the real world. They cannot concoct fantasies either for the investing public, customers, or internally among employees. There has been far too much of this and much of it is newsworthy. They must acknowledge real issues and provide real solutions. In doing so, they should have the interest of the entire system foremost in their minds, then secondarily figure out where they have a profitable role in a sound system. They must not be enslaved to quarter by quarter numbers and must not live in a Through the Looking Glass world. This is no small matter.

In upcoming days we will discuss responsibilities to customers, employees and other stakeholders.