Management has to embody checks and balances

Listen to this article


From Mr Philip D Sherman.

Sir, Although I loath to argue with my old Citi colleagues and friends Robert Jenkins (“Has Dimon become an argument for breaking up the banks”, Comment, October 7) and Ian Cormack (“Banks’ deadly blend of complexity and leverage”, Letters, October 9), and without expressing a view on JPMorgan, the financial world’s current piñata, I think that we must accept that in a large and complex world, we need big and complex financial institutions, as Mr Cormack seems to concede in respect of Citigroup.

We therefore need to focus more on their management and less on breaking them up. Although the breakdown in the repo market was the “accident waiting to happen in plain sight”, the root cause of the crisis was not institutional complexity or size but rather that old favourite of bankers, over-aggressive real estate lending, which was broadened to include the house mortgage market. “Complexity” was not the issue.

Higher capital and a tighter business, risk and asset model should certainly be part of the solution, but I would focus on management itself. We need to get past the cult of the chief executive as superhero (the burden of Mr Jenkins’ article) and ensure that banks have a broad, competent and internally sometimes argumentative senior management. This formula generally worked in Citi’s great days down to the mid-1980s. An independent chairman might help – the evidence from the crisis is mixed – but the key is that management itself embodies checks and balances.

The second requisite is that, as has been the case at Wells Fargo, leadership is responsible to build a proper culture – respecting the public role and franchise of banks – and to “walk the talk”. In this context, large mergers can be quite dangerous.

Finally, I would shift the management paradigm from “earnings” to “risk management” and, in this context, put a great deal more management and regulatory emphasis on portfolio management, broadly conceived to cover not just risks but how the risks are accounted and managed. The CEO would have to see his/her job as “chief portfolio officer”. In such a necessarily “risk-first” environment, banks will compete to raise their price-earnings multiples, reflective of market confidence, as opposed to working for “earnings”, much of which may not materialise in cash for some time after they are booked.

Philip D Sherman, Bronxville, NY, US

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't copy articles from and redistribute by email or post to the web.