2  BIS central bankers’ speeches  markets) might prevail in shifting a culture from a client focus to one that is overly defined by financial performance. 12. It is interesting, when comparing and contrasting cultures within banking, to consider for a moment Glass-Steagall and its separation of commercial and investment banking to prevent commercial banks from trading securities with their customers’ deposits. 13. Passed during the Great Depression, following a number of bank runs which destabilized the US economy, Glass-Steagall’s motivation rested on: real or perceived conflicts of interest, in the form of collusion between banks and their affiliates with the affiliates borrowing from the banks to buy securities and then selling securities to repay the banks’ debts and worries that banks would engage in risk-taking speculation, trading with customers’ deposits rather than lending to promote economic growth. The “firewall” created by Glass-Steagall was gradually weakened over the years and, as you all know, was eventually repealed in 1999. Some argue that this repeal contributed to the Global Financial Crisis. Joseph Stiglitz, the Nobel prize winner, summed it up thus: “Commercial banks are not supposed to be high-risk ventures; they are supposed to manage other people’s money very conservatively….. Investment banks, on the other hand, have traditionally managed rich people’s money – people who can take bigger risks in order to get bigger returns.”3 14.
In the past, banking was regarded as a reputable profession and bankers were highly trusted and respected both by their customers and by members of the public more generally. This was not surprising as basically customers entrusted their life savings to their bankers and the preservation and safety of their hard-earned money was in the hands of those bankers. Although nowadays customers still place their life savings with banks, bankers no longer enjoy the same high degree of trust and respect from society, especially after the Global Financial Crisis. What has changed so dramatically to bring the reputation of bankers so low? 1  FT.com – March 12, 2009 “Welch condemns share price focus”. BIS central bankers’ speeches  1  Change in modality and governance structure of banking 6. Well, the modality and governance structure of banking have changed a great deal over the last century. More importantly, these changes have created an incentive system that leads to a misalignment and disconnect between the interests of the owners of banks (i.e. the shareholders), bank management and customers. 7. Not so very long ago, banking was a business conducted by individuals, families and (more latterly) private partnerships, where the owners and managers of banks had ample “skin in the game”. They stood to lose not only their investments in the banks but also their entire family wealth or, in some more extreme cases, even their liberty, should their actions, or the actions of their partners, result in the failure of their bank.