Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

How to Cure Western Bankers of Bad Bankster Behavior

Politics / Market Regulation Jun 11, 2010 - 07:38 AM GMT

By: Money_Morning

Politics

Best Financial Markets Analysis ArticleMartin Hutchinson writes: Masayuki Oku, the new head of the Japan Bankers Association, recently said that Western bankers did not understand self-control the way Asian bankers did, which was a major cause of the 2008 crash and the Great Recession.

I think he has a point.


Oku's main purpose in denouncing Western bankers for their lack of self-control was to object to the tougher proposed capital rules from the Basel Committee, the global body that sets banking regulations.

The Trouble With Banks
As president of Sumitomo Mitsui Financial Group Inc. (OTC ADR: SMFG), Oku is worried that tougher capital rules will make it impossible for banks to earn an adequate return in the highly competitive Japanese domestic market.

He's right there, too.

In Japan, the Post Bank forms a government-owned competitor to the commercial banks with $3 trillion in assets and access to huge amounts of cheap deposits through the nation's post offices. In a normal market, if all the Japanese banks had to raise more capital, returns on loans would increase so that they all earned a reasonable return. But with a state-owned Godzilla on the playing field, that becomes impossible: Godzilla undercuts everybody.

However, the solution to this is to lobby the Japanese government to privatize the Post Bank, as was originally planned. What are banking lobbyists for, anyway? It's not as if Japanese banks are incapable of losing money. They just do so in "old-fashioned" ways, such as through real estate lending. So a bit more capital won't hurt at all.

Oku has a much better point in relation to Western bankers. He believes that Western banks need more capital than Japanese banks because their top executives get bonuses that are geared too much to short-term results. This causes the Western banker-financiers to lack the self-control that their Asian banking counterparts still possess.

I don't think it's an ethnic thing. If you paid Japanese bankers as executives at the now-defunct U.S. investment-banking-giant Lehman Bros. Holdings (OTC: LEHMQ) had been paid, the Japanese executives would almost certainly start behaving like their Lehman brethren within a few short years.

They would hide assets off the balance sheet, load up the balance sheet with toxic rubbish, gamble wildly in the derivatives markets and leverage their banks to the eyeballs. After all, British and American bankers did not behave like that 30 years ago, when their own incentives were much more staid and conservative than they are today.

In my view, the problem with Western bankers is the amount of remuneration - along with the focus on short-term profits. The biggest offender - the thing that most induces "bad-banker behavior - is the concept of "drop dead money," which is actually so much money that bankers are able to retire at 35 or 40 and live well for the rest of their lives.

The Good Old Days of Banking
In the old days, a fairly senior Western banker made a few hundred thousand a year in today's money. That didn't enable him to live like the international jet set. Nor did it enable him to retire comfortably at 40, because his capital assets would be insufficient to support him comfortably for a 30-year to 40-year retirement (unless he had inherited money, as many did).

That meant that senior-banking executives in their 40s and 50s had a vested interest in keeping the institution alive. The institution would continue to provide them with a moderately opulent lifestyle during their working life. And after they retired, they could maintain that lifestyle - and perhaps even add a splash of wealth - by selling their partnership interests in the bank.

It wasn't much different for top-tier executives. Even partners in investment banks - and certainly top management in commercial banks - worked only normal amounts of hours. The concept of "bankers' hours" in the old days did not mean 90-hour workweeks. Bankers routinely worked 25-30 hour weeks. There were always several good company-paid lunches and a couple of afternoons off at the golf course.

In such an environment, senior bankers maintained a balanced life. They developed interests outside their banks, and they maintained wide social and cultural interests. There was little danger of losing self-control. And there was no incentive to do so.

In today's market, bankers are regularly putting in workweeks of 80 hours, 90 hours, or even more. And few have outside interests - other than the occasional expensive charity dinner.

Their only objective is to make "drop-dead money" before some younger, hungrier banker forces them out, or they find they can't take the pace anymore. Naturally, in such a workplace culture, they take crazy risks in order to maximize their short-term earnings.

"Self-control" is an unnatural act, and seems to go against their self-interests. After all, if they reduced their risks and short-term earnings, they might find themselves in the horrid position of having grown old before they grew rich.

Changes to Make

There is a solution. It will permanently improve Western-banker behavior.

But it will take time to implement.

It will also take time to change the banking-sector's culture.

Money must be made much tighter, so there is simply less ability to leverage. Regulations must be designed so as to ensure that banks manage risks properly, and don't take huge bets that endanger the institution. A lengthy period of low deal flow and modest earnings on Wall Street would not hurt. That slight malaise would bring about the tradeoff between work and outside pursuits. That, in turn, would make it impossible to retire at 35 or 40, while at the same time making it attractive to develop a full range of outside interests.

Sumitomo Mitsui's Oku is right. But the Western banking system must go through several years of high interest rates and depressed markets before it gains the "self-control" it lacks.

Source: http://moneymorning.com/2010/06/11/western-bankers/

Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in