As we slowly emerge from the greatest economic and bank- ing crises encountered in more than three-quarters of a century, it is clear the successful banks in the new environment will be those that could be described as "good banks". While we all know how to describe a "bad bank", what does a "good bank" look like? Does it exist or can it exist? And can Ireland produce good banks?
In 2013, Mazars, with the Economist Intelligence Unit and others, engaged in a pro- ject designed to answer that question. We work with banks and many other businesses and, perhaps more importantly, everyone works with banks in one way or another.
Business and society need functional banks and an effective banking system. So the Good Bank Project drew together some of the best thinkers about business, banking and society and asked them to define what makes a good bank.
The answer is summed up in three characteristics – the good bank is effective, innovative and trustworthy. These sometimes conflict but the primary element was, the study concluded, trust.
Rebuild trust
How does a bank rebuild trust with taxpayers, customers, regulators and investors? We trust people because they are competent, we trust people who are reliable. Most importantly, we trust people we consider to be honest.
These all relate to how we deal with people. So our first conclusion might be that we have to deliver a service that is competent, reliable and, above all, transparently honest.
For customers, that means doing what you say you will do, when you say you will do it and being up front about costs and conditions.
The same holds for other stakeholders. Regulators are looking for banks to be compliant all of the time, good at managing risk and straightforward in their dealings. As the regulator here has grown more teeth, the best financial services businesses see risk- management and compliance as a competitive advantage.
The good bank understands that being compliant requires better and more reliable systems and processes and that the cost of getting risk-management and compli- ance right is outweighed by the benefits – reduced regulatory intervention and more sustainable businesses.
Two other issues arise when one starts to discuss repairing banks generally. The first is the alignment of incentives.
Need to motivate
How do you balance the need to motivate bankers to be efficient – and profitability is one indicator of efficiency – and at the same time encourage them to focus on sustainability, which may mean forsaking long-term profit?
Perhaps the answer lies in building reward systems that recognise both the up and down in profit cycles so bank- ers do not pocket all of their bonuses until profits have been sustained over a period.
In recent statements by Mario Draghi, the governor of the ECB, and by his EBA counterpart Andrea Enria, there seems to be strong indications that banking in Europe is about to enter a period where the guarantee of a public backstop is no longer assured.
This will, if it comes to pass, create a new landscape for banking.
Mark Kennedy is a partner at Mazars
