Unmanageable

So far banks in Canada have been well managed and have avoided getting into trouble.

However, they should not press their luck too far. History is replete with other banks that had a spotless reputation and had mishaps later.

In Britain in 1995 Barings Bank, which came through the Napoleonic and two world wars, went bankrupt; the result of malfeasance that was undetected until it was too late.

That should serve as a warning to our banks.

The executives of Canadian chartered banks are exceptionally competent and do not lack integrity. Perhaps they should be classified as very able technocrats. Yet there is no way they could keep track of all the managers of their departments. Our major banks have nearly 80,000 employees.

The epic misbehaviour of Barings Bank referred to above is the result of being too big. It has been said repeatedly that some banks are too big to fail. Rather, that should be amended to claim that even Canadian ones are becoming too big to survive. Sooner, perhaps hopefully later, they will be forced to become more manageable.

According to Sally Dewar, head of regulatory trading at JP Morgan Chase and Co., the huge organization had to spend more than $36 billion in legal bills during the financial crisis in the past decade to cover troubles.

She said recently, “It’s difficult for a business head to take what could be hundreds of  points and note any schemes about a particular desk or trader,” then try to refine those data points to help predict patterns of behavior.

Even now, can the head of any of our chartered banks be aware of the very large number of derivatives that the bank has placed with say 75,000 employees? Is it humanly possible to do so?

Banks currently are making loans to individuals who are purchasing homes with practically no down payment. So reliance is placed on the local officials’ belief in the integrity of the borrowers.

Officials are rewarded for the loans placed on the books so there is an incentive to approve as many loans as possible. It is not generally realized that these lax arrangement should be shunned by our banks.

Chartered banks nowadays are trading in markets. Trading rarely is profitable over the long term. Should banks be engaged in that activity with depositors’ money?

It has become clear that banks eventually get to a size where they cannot be managed effectively. Money laundering and foreign exchanged transaction will entail trouble at some point.

What is wrong is that banks’ CEOs unwittingly become complicit in matters that no one could possibly oversee.

 

 

Bruce Whitestone

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