The Fourteenth Banker Blog

April 12, 2010

What Special Responsibilities Does a Large Bank Have?

Filed under: Running Commentary — thefourteenthbanker @ 3:07 PM

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.



  1. As Ronald Reagan would have said “There you go again!”

    Big banks should not have any special responsibilities besides being banks.

    And banks are to take risk, and sometimes fail precisely because of that, in financing the small businesses and entrepreneurs that can take us forward, until that moment where the capital markets can take it over… and banks have absolutely nothing to do in the sphere of the AAA rated or in financing the government… and much less when it is not required to have any capital to do that.

    Comment by Per Kurowski — April 12, 2010 @ 5:44 PM | Reply

  2. “However, when the ideals are lost, the policy is not far behind.”

    And one might add, “the country not far behind that.”

    Too bad our politicians and the business whores they bed down with don’t understand this.


    Comment by Sandi — April 13, 2010 @ 4:25 AM | Reply

  3. In the context in which you’ve framed the discussion – I wholeheartedly agree with all three of your principles for large banks. I also agree with the contextual setting. If the purpose is to find solutions, we have to first identify our goals/ideals – then work toward creating ‘rules for the game’ that incentivize the desired behaviors.

    I also agree with Per and Reagan (!), that such requirements are now sorely lacking.

    The three principles you’ve outlined are a good start for our conversation re: solutions.

    Comment by Lucy Honeychurch — April 13, 2010 @ 9:27 AM | Reply

  4. Safety and Soundness, and Lending to the Community seem to be the basic functions of the bank side, but when trading to compete with the investment community at-large, puts the basic principles on a whole other playing field. Liquidity as a whole cannot be sustained when ‘at risk’ choices become the number one priority. I come from the old school of banking. Years of experience has shown me that the banking side did NOT make the money for the bank, as this was regarded as more a customer service function. Sound lending was where the money could be made. The better you were, and let’s take that in context, better meaning decisions made with prudent, risk-adverse underwriting, SHOULD decide who wins or who loses, and can make you better than your competitor, which rewards you with longevity, better received profit margins, a more excellent credit rating for yourself as a company and rewards you with growth opportunities. This crisis has shown us that moral hazard is REAL; when you allow the largest banks to misrepresent, become predators, and take profits over soundness, ‘customer for life’ doesn’t even matter now, it’s customer til you lose all your money. When trust fails and your customers dwindle, what you have left is a gaming system filled with the opposite of safety and soundness. Banks cannot be casinos. Now we are setting the stage, being examples, showing govt how it’s done, hiding, scheming, taking over predatorially the next sucker, person or corporation or competitor, in an unnatural, usually fraud infested way. As an idea of a GOOD INCENTIVE, we only received a ‘bonus’, small as it were, if I submitted to underwriting with all conditions satisfied, which allowed me to out think the underwriter and not ONE condition could be outstanding. That was a terrific incentive to better my judgment skills, learn my industry requirements, and prepare myself and the borrowers for success. INCENTIVIZE FOR QUALITY OF WORK, IT STRENGTHENS THE CHARACTER WITHIN. If you incentivize the wrong behaviour, you will bring on short cuts, bad decisions, wrong motives and a lack of character. Pride in oneself and others brings trust back into the equation. Pride just for pride sake or for the wrong reasons, ends badly. Now we have more problems than we know what to do with. Regulators are regulators for a reason, they have failed us. Will we be able to put humpty dumpty back together again? I don’t think so, the public depended on the large banks to do the right thing, and they have shown where their true loyalty lies, their own pocketbooks. The government won’t admit their mistakes, are we going to admit ours? We have rewarded the wrong people. Thank you for this opportunity for discussions, I look forward to seeing ideas that bring back CHARACTER AND TRUST.

    Comment by Ruth — April 14, 2010 @ 10:31 PM | Reply

  5. i need daily updates on how banks make their money

    Comment by favour — May 7, 2010 @ 1:37 PM | Reply

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