Banking: Forget the greed. Waste is the problem.
Lunch special: Politics of envy generously seasoned with populist condiment. Dish heated to boiling point. Fake news and emotional diatribe infused. All honest flavours lost. Any takers for idealist mush on toast? Unfortunately, yes. Far too many right now.
As we approach a general election in the UK, the banker bashing anthem once again ring aloud from the political class. The ‘greedy bankers’ should be drowned in farmer’s slurry alongside tax cheats and company bosses using zero-hour contracts. I mean employers matching employee cost with customer demand.. shocking stuff, shoot em at dawn!
It is of course beyond argument that bankers, traders, asset managers and the other deal makers of our financial economy are well remunerated. To an extent, the additional pay is a function of high achievement, unique skill sets and usually, a difficult and challenging rise up through the ranks famed for long and intense hours.
Are they greedy? Well they certainly want to earn more. Who doesn’t want the best for their family and can any of us genuinely claim we face no risks in the future that would be lessened by financial padding. But shouldn’t the alarming increase in inequality be tackled? Yes, of course but not by demonising our high earning producers. Would we point knives at top goal scorers in Wembley or shout down the winner of master chef?
At the end of the day we have a tax system and governance that exists so much of the generous tip of the ‘moneyberg’ is redistributed across society. We should probably levy a higher income tax on the most excessive income but as a starting point let’s admit that the desire to earn more, live better and prosper is natural and right. Lets not soften the drums of production and impede the economic march because the brightest and hardest working are commercially sucessful.
Bankers, traders, quants, technologists and asset managers should all be encouraged to push the boundaries of what they can achieve because the broader economy and public all benefit. It may not be obvious but every single product and service in our daily life, from a pepperoni pizza to piano lessens, is easier to buy and cheaper with less price volatility because of the work done in our banking sector. Encouraging competition and success in banking doesn’t cost the system overall.
What we really pay for is hidden waste in financial services, especially in banking. Ultimately our account charges, foreign exchange fees and mortgage interest rates are all that bit higher because of waste. Financial services represents 7.2% of the UK economy (GVA) so the effect cannot be deemed marginal.
Hidden waste take fairly unique forms in banking and consists of:
1.) The less explicit costs of government and political knee-jerk policy and insufficiently thought-out regulation. Often the practicalities of regulation and the secondary economic effects of regulation are not considered.
2.) Waste within banking is also the function of poor management structures. There are typically too many layers of management with convoluted reporting lines and an obsession of micro level control rather than holistic evaluation. Net Net: The bigger less regular problems aren’t managed until they are large and very expensive to fix!
3.) Labour rigidity. Banks, particularly the larger organisations are traditionally really poor at developing their employee skills laterally. Workers tend to fall into silo and responsible for specific function. While specialisation of labour has benefits there are costs associated with employment that is too rigid. When challenges arise banks are often forced to hire outside contractors or consultants at high rates and of course as specialised employees are promoted they often struggle with the breadth of responsibility associated with management.
Some of the more offensive examples of waste within financial services here in the UK are listed below . All of the factors mentioned above can be seen here and ultimately one should ask themselves who is been served?
- Estimated £45 billion** in costs for PPI claims. Of course banks should have acted more ethically and invested more in compliance upfront. Nonetheless the manner in which redress has been applied is clearly hugely wasteful.
- Banks are squandering £2.7 billion a year chasing false leads because outdated anti-money laundering (AML) systems.*
- £3bln – legal, consulting and one-off implementation costs of the Solvency II regime within the UK insurance industry.
- £107m – The amount paid to advisers so the government could support RBS, Lloyds in 2009. ***
So to conclude I would define Hidden Banking Waste with the following.. Probably more to add but this is where I am starting off!
Hidden Banking Waste = Poorly designed regulations + labour rigidity + tech inflexibility + management overkill.