Sunday, 22 July 2018

Regulators as agents provocateurs

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Politicians risk retarding overdue bank rehabilitation with mind games, says Keith Mullin.

Keith Mullin Commentary image

Keith Mullin

IFR Editor at Large

HOW MUCH LONGER can regulators and politicians continue to manipulate the bank debate in their self-serving and frankly sinister manner? They have already inflicted much damage on the industry by perpetuating the public’s false sense of unremitting malevolence and uninterrupted wrongdoing at investment banks. Can this go on?

I pose this as a general question, but also with an eye on the Deutsche Bank culture story that’s been driving me nuts. For those of you who haven’t been following it, the short version is this: a months-old document put together by German regulator BaFin and Ernst & Young was leaked to the press detailing perceived shortcomings in co-CEOs Anshu Jain and Juergen Fitschen’s efforts to evolve the culture at Deutsche. The document claims those efforts have been lacklustre, especially around the Libor manipulation scandal and traders involved in it.

In December, the bank paid a €725m fine as part of a collective settlement on interbank rate-rigging following an investigation into euro and yen interest-rate derivatives trading. Still, the regulator wants senior heads to roll and is clearly peeved this hasn’t happened.

This follows hard on the heels of a very public spat between Fitschen and German finance minister Wolfgang Schaeuble in December in which the politician made a series of irresponsible and inflammatory comments caricaturing banks as innovative forces hell bent on evading regulation – as well as some patronising comments about Fitschen. This has all the hallmarks of something approaching an official vendetta, and you have to wonder what the recently installed co-CEOs are making of it.

This has all the hallmarks of something approaching an official vendetta

PUBLIC STRUTTING AND muscle-flexing by politicians just to prove – arguably to themselves – that they’re in charge goes beyond tedious. In fact, political mind games seeking to undermine the banks in order to maintain an upper hand in the debate are counter-productive. They risk retarding the overdue process of bank rehabilitation and delaying at a crucial time the full and active re-engagement of the banks in a European growth story that needs all the help it can get. And in the particular case of Deutsche Bank, they’re also getting in the way of the monumental task Jain and Fitschen have on their plate of right-sizing the bank, cutting the balance sheet and driving up return on equity.

Unreconstructed bank bashing, snide inferences and accusations by implication don’t have a place in the debate. And will we ever hear the end of the constant whining about culture? The leaked letter from BaFin to DB’s co-CEOs says: “As new management, you announced cultural change … but in the case at hand [ie, Libor] it appears that you did not take clear action, especially in terms of staff.” I’m not even sure this is necessarily an issue of culture, but whatever the case – and I’ve said this so many times – culture doesn’t and can’t change at the flick of a switch.

Only Jain and Fitschen know if they’re doing all they can to install a new culture. Still, there has clearly been some progress – I point to the bank’s reworked code of business conduct and ethics, the €1bn investment in Strategy 2015+ to elevate systems and controls, some judicious hiring (Daniela Weber-Rey from Clifford Chance in mid-2013 as chief governance officer and deputy global head of compliance, and Thomas Poppensieker from McKinsey on January 1 – with a direct line into Fitschen and Jain), and the independent review panel to devise a sustainable and transparent compensation system.

BEYOND ISSUES LIKE these, I’m not entirely sure what else CEOs can realistically be expected to do. Jain and Fitschen are mid-way through a bold strategic plan and are getting through legacy issues. On the issue of wrongdoing, you have to assume the people that work for you and the people you hire behave with integrity. In a blog I wrote a year ago entitled: Ditch the red herring of banking culture, I wrote: “Can or should cultural values ever seek to go further than ‘stick to the rules and do the right thing’?” My view hasn’t changed.

Jain may not have convinced everyone in his short tenure to-date as co-CEO – and I’ve certainly expressed scepticism in the past – but he’s emerged as a very credible co-pilot of the bank’s transformation: softer in tone, ditching the swagger of the former derivatives gun-slinger in favour of a statesman-like demeanour, and even recanting the derivatives credo.

Only Jain knows how hard his own transformation has been – and how hard it is having your home regulator and political system appearing to work against you. The parallels with Bob Diamond are too obvious to pass up. Way before Diamond was hounded from office at Barclays by the UK establishment, I’d written: “he inhabits a different world now and it’s by no means certain if he’ll put up with it or if it will put up with him”.

In the end, it didn’t put up with him. Jain and Fitschen’s contracts run to March 2017. What are the odds on both of them getting there?

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