Sta Hungry Stay Foolish

Stay Hungry. Stay Foolish.

A blog by Leon Oudejans

Banks are bleeding

Early October 2016, Dutch based ING Bank announced that it will cancel 7,000 jobs over the next 5 years. A trade union even stated: “We understand that due to digitalization and automation jobs must disappear” (eg, DutchNews, NL Times). A less popular explanation is that banks are also downsizing because of cheap money from the European Central Bank (ECB).

Essentially, banking is not much different from trade: banks borrow (buy) money at low interest rates (ie, consumer savings) and they lend (sell) money at higher rates (ie, corporate loans, mortgage loans). The difference between both interest rates is called the interest spread. Further complexity is added by differences in duration (eg, fixed vs variable term), currency, and volume.

The ECB quest to stimulate the European economy by lowering interest rates is hurting the banking business model. Despite low interest rates, consumers still expect to be rewarded for maintaining bank balances. Banks are unwilling to charge interest rates to consumers for their savings and deposits. Low ECB rates and banking competition does not allow banks to charge high interest rates on corporate or mortgage loans. Hence, the interest spread is decreasing. 

For centuries, the interest spread has been the main source of income for traditional (savings & loans) banks, unlike investment or trading banks. The banking business model relied on a high interest spread to pay for the high overheads (eg, electronic data processing, fancy headquarters, large number of banking network outlets, employee remuneration). 

The high interest income allowed banks to innovate in automation but stopped them from downsizing the number of human jobs. The international banking crisis following the housing crisis of 2007 was the first realistic opportunity to start downsizing the number of banking jobs. Society would finally understand and accept the job fallout.

The current second wave of banking job losses is to a large extent caused by the ECB. Early 2015, I wrote two blogs in which I expressed my anger about the forthcoming government bond purchases by the ECB (part 1, part 2). However, I failed to foresee the future disruption in the banking business model. Early 2017, the 2016 Annual Reports of banks will paint a dire picture.

On 7 June 2016, the President of the Dutch Central Bank acknowledged in Dutch Parliament that banks, insurers and pension funds are suffering from this long period of low interest rates. He expected that this will erode the banking profits and will force insurers to recalculate their long term commitments to policyholders and thus their solvency (eg, FD).

The situation at traditional banks is further complicated by (1) an avalanche of new accounting and banking legislation, regulation and supervision, (2) extreme penalties from non European banking supervisors (eg, Deutsche Bank, RBS), and (3) the competition from successful financial technology (aka “fintech”) start-ups (eg, KPMG).

The banking reputation never really recovered from the 2007 banking crisis. The recent banking scandals at Wells Fargo and RBS suggest that the banking culture didn’t really change since 2007. Some people may see this bleeding as revenge. Confucius once stated: “Before you embark on a journey of revenge, dig two graves.” The bleeding of banks will hurt all of us.

Midnight Oil – Beds Are Burning (1987) – artists, lyrics, video, Wiki-1, Wiki-2

How can we dance

When our earth is turning

How do we sleep

While our beds are burning

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