I’VE HAD A couple of fascinating meetings in the past few days with some very senior bankers that have provided me with a lot of insight and food for thought. But it’s not about the broad themes afoot in investment banking, which we all know about: dealing with more onerous regulations, right-sizing for the new industry order, figuring out the business selection piece to optimise client value-added, dealing with fines inflation, and of course managing for sustainable and smooth returns through the cycle.
Working in investment banking media as we do at IFR, you can imagine that a lot of the chatter we have back and forth involves these issues and others. But no, the reason I was so fascinated this week was to do with one of the other elephants in the room: the issue of how on earth to manage bankers, i.e. dealing with the individuals who walk out of the revolving doors every evening.
I found myself being transfixed by talk of how banks are calibrating individual performance metrics via management information systems and tools that provide senior management with the answers they need relating to decisions on allocating and utilising capital, calculating returns per client, per product, per region – and per banker. In short, being absolutely sure you’re paying for performance at the banker level and that at the client level there is adequate and quantifiable return.
NOW, I’VE BEEN at the sharp end of investment bank spin doctoring for more years than I care to mention. And I’ve patiently listened to pitches about how this year’s soap powder washes whiter, so I’m not going to fall into the trap of stating that this time it’s different. Except that it does feel different this time.
One bank I spoke to – which I can’t name because the meeting was a backgrounder – has broken down its fixed-income business into something like 80 different buckets and at the touch of a button can figure out how much capital is being allocated to each of those buckets and what the returns are at a very granular level. They’ve even got their bankers filling out time-sheets like lawyers so they can allocate the data correctly – so getting proper efficiency metrics, making the right financial and human capital allocation decisions and rendering pay for performance a bit more of a science.
We’ve all heard about the greater levels of accountability and responsibility to which senior managers are beholden – on a personal level vis-à-vis the regulators, and not just with regard to their institutions. The regulatory scrutiny of bank management is having a dramatic impact on how senior managers view – and are required to view – the world.
You can argue that on the issue of individuals behaving badly or engaging in wrongdoing or skulduggery, it’s never been OK for senior management to claim ignorance of what went on under their watch, even though it was in most cases true. These days, that won’t wash with regulators or with other stakeholders.
The new status quo has forced a change of management focus that frankly makes a lot of sense if the point of the story is to manage banks – and investment banks in particular – as businesses, not as a super-senior banker said at a meeting this week, “as an ATM for employees”.
Regulatory scrutiny of bank management is having a dramatic impact on how senior managers view the world
HERE’S THE THING: it’s all well and good for senior management to bury themselves in management information systems, but have the troops got the joke: i.e. that it’s no longer about levering up the balance sheet and hiring talent in order to super-charge revenues? Only to a point have they got the joke, I was told this week. There is still a sense among many investment bank employees that we are in the midst of a cycle, albeit a long-run cycle, and that sooner or later things will go back to the way they were and regulatory scrutiny will shrink.
But that ain’t how most senior managers see it. I’m not talking here about the vagaries of individual products or product sub-segments or the velocities of global or regional business cycles. Those are called cycles for a reason. No, the way politicians and regulators want investment banks and the people who work for them to behave; the way the market structures and market architectures are changing, the levels of accountability, the transparency, the clarity around governance: those things are here to stay.
Senior managers continue to be astounded by the requests they get down the line from people demanding x or y, be it systems capacity, people or capital: things that don’t add to the bottom line, which are not returns-accretive, or which will not become returns-accretive in short order. The quest for a creep back to the old ways is still with us.
“Don’t ask me if I’m pro or anti investment banking. That’s not the right question. I’m a businessman and I want to make money where I can. In that context I like investment banking and will allocate capital to it if it can meet my target rates of return through the cycle without huge volatility swings,” was what I was in essence told by a senior banker at a universal bank this past week.
That’s pretty grown-up talk. The question is: is investment banking grown-up enough to meet the new challenge?
