Big, bad bankers are the true disruptive force

THE swell of job cuts at global banks has prompted fears of technology causing a large disruption in employment in the banking industry.

But the extent is exaggerated, at least for now, and rubs out the real disruption in banking: mismanagement by senior executives, and the failure of regulators to punish top bankers for harmful decisions during the crisis.

There is no doubt that some banking jobs have been made redundant due to automation. Electronic trading comfortably makes up more than half of all forex trading, Bank for International Settlements data showed. Fewer bank tellers will be needed in time, as banking shifts online.

But certain problems at banks today are, in fact, a result of under-investment in technology by management in the earlier years.

Take Deutsche Bank, which announced its latest round of job cuts. As early as 2018, the bank would have cut about 9,000 jobs worldwide.

Germany's largest bank had grown so complex that its backend operations had bloated over the years.

As at March this year, its system comprised about 4,000 applications - down from 4,400 from streamlining work that is still ongoing. Many of these applications were not fully integrated with one another, reported the Financial Times.

Staff were hired to manually reconcile data picked through the labyrinth. And this clearly was not the way to run a bank that had an all-in notional derivatives exposure of 46 trillion euros (S$70.2 trillion) as at September. Deutsche Bank has been hit with hefty fines over its complex trading operations and has been rapped for its dismal monitoring of dirty money and terrorism financing, so the sorry state of its IT system is a cautionary tale for large lenders that have not fixed legacy systems. The plumbing will likely take years and more investment - a problem now compounded by dwindling income.

The situation had played out similarly at Standard Chartered, which went through a major restructuring for the most part of last year. It had been dogged by loose credit controls in markets such as Indonesia. Credit decisions should be powered by rigorous data, allowing banks to navigate emerging markets in particular. (One auditor quipped once that an entrepreneur in developing countries has four accounts at any given time: one for the business, one for the tax authorities, one for his wife, and one for his other wives.)

Standard Chartered said it would spend US$3 billion on technology and strategic opportunities over the next three years. It will also cut 15,000 jobs by 2018.

The systems overhaul at large Western banks just did not catch up with at least two decades of chest-thumping global expansion. A McKinsey review of 10 global banks showed those lenders to be present in about 65 countries in 2008. The expansions were not sustainable, especially where there were strong domestic banks soaking up deposits needed for stable funding.

The post-crisis environment jolted Western banks to that reality. Global banks bowed out of many non-core operations, and brought in a new clean-up crew. Deutsche Bank, Credit Suisse, Standard Chartered and Barclays appointed new CEOs in 2015. All but Barclays accounted for almost 30,000 of job cuts planned last year. Barclays boosted the haul this year, cutting at least 8,000 staff in just four months, the Financial Times said.

Thousands of banking staff, many of whom are unlikely to have caused the mess in the first place, are now reduced to a cost burden. Questions remain if the job cuts could have been less of a boom-and-bust shade if banks were managed sustainably.

Financial institutions have blamed job losses on higher regulatory standards. This reasoning is unsound.

Broadly, worthwhile regulatory costs are to do with higher capital buffers against risks and stronger monitoring of dirty money flowing across borders. Standards have risen because many banks failed their duties during the crisis. And with more capital cushion, banks are stronger today.

Banks make money for the most part off deposits of the average salaryman. No doubt, margins have thinned as monetary easing ran ahead of fiscal policy that should be used to fix the crisis caused by banks. But plainly, banks are finding it harder to make money today because the income engineered before the crisis was off looser regulations that allowed banks to make excessive profits on excessive risk on bets with funds that did not belong to them.

What can be said is that as regulators doled out an estimated US$350 billion in penalties on banks (and so, shareholders), they have failed to go after top banking executives. WSJ showed that out of 156 criminal and civil actions levelled against large banks by the US Department of Justice (DoJ), less than 20 per cent of these suits involved bank employees. As estimates put the cost of the crisis at roughly US$15 trillion, Wall Street's top bankers stayed out of jail.

The mind-numbing US$14 billion DoJ fine on Deutsche Bank over sales of soured mortgage-backed securities had not one errant staff prosecuted.

The common excuse from top banking executives is they did not know the extent of the damage during the crisis. Perhaps had they chosen to clean up their systems, they would have. Whether they wanted to know, is a different matter altogether.

There is some comfort, then, that the Monetary Authority of Singapore, in fining DBS and UBS for breaches related to 1MDB-related funds, also singled out the fault of specific bank officers, and instructed management to investigate lapses and take disciplinary measures against the staff involved. DBS, in turn, has said senior executives are among those who would be held accountable.

Another fear of job disruption from technology is to do with competition from fintech. But this lacks perspective. Fintechs have scooped up support from consumers in recent years as banks have provided poor services. Those stung by the crisis are far more wary of banks today. To be sure, few fintechs are sustainable, and rely on bank funding while fuelling anger against banks in the same breath. But the support for fintech speaks of banks' reputational hit.

A broader question comes about as banks shed thousands of jobs. How will it affect a rising tide of anti-bank sentiment? Local customers' deposits are the strongest source of funding for banks, and borrowers should turn to financial institutions for good debt and advice on long-term investments. Banks, in turn, build robust profits. Resentment against banks can hurt an already fragile economy. Without strong banks to build and intermediate credit expansion, businesses will find it harder to flourish.

Regulators must respond with thoughtful rules. In keeping banks in line, they must not kill them off with punitive penalties that also hurt none of the executives who put the banks in precarious situations. But the biggest risk of disruption is not from stricter regulations or technology. What we must still fear first are big, bad bankers.