Other People's Money the Revolution in High Street Banking

Other People's Money the Revolution in High Street Banking

One of the best book reviews recently published by Emerald.

Other People’s Money the Revolution in High Street Banking

David Lascelles Institute of Financial Services, 2005

Lascelles';s history of commercial banking (principally the clearers) since 1945 is likely to become the standard work on the subject. Starting with the cartelised, controlled system of the initial post-war period, he shows how the freedom conferred by the new policy of Competition and Credit Control in 1971 was followed during the next 30 years by the innovation and diversification, the mergers and restructuring, and the changes in norms and ethos which have produced today’s industry. The book is compellingly readable and remarkably wide-ranging. The sectoral history is deftly placed in its overall economic and social context; salient features of the legal framework and banking regulation are concisely described; and the narrative is enlivened by vivid profiles of both the major figures and the generic types of the British banking world at different times.

The history incorporates an account also deserving to be treated as an important contribution to the study of commercial banks as human organisations which not only fulfil a corporate purpose but also serve a social function. As such it belongs to a tradition of which perhaps the best known early example is Peter Drucker’s Concept of the Corporation, a book based on the author’s experience of 18 months spent as a consultant at General Motors in the latter part of the Second World War. Drucker’s work proceeds on three levels. The first concerns the corporation as an autonomous institution to be judged in terms of its own corporate purpose. The second deals with relations within the corporation against the backdrop of the social beliefs of the society of which it is a part. And the third treats the corporation as an entity with a broader social function that includes its contribution to the success of the society of which it is a part (Drucker, 1993). The three levels overlap in various ways, particularly the second two, and all three bear on subjects taken up under the heading of corporate governance[1]. Lascelles does not explicitly adopt a conceptual framework but the book none the less contains a thorough review of the issues which one would expect to find addressed in a study of commercial banks in this tradition.

The weight given to different subjects reflects the perspective of the new millennium and the fact that the corporations Lascelles covers produce financial services rather than goods. For example, he devotes much attention to the often halting progress during the post-war period in the career prospects of women employees. As one would expect in a study of this kind, the various aspects of corporate governance are covered at length. Chapters 13 and 14 range over the subject in a highly concrete way with accounts of changes in the way banks relate to their customers and in the priority accorded to shareholder value among corporate objectives. The consequences of attributing overriding priority to the latter is illustrated by Brian Pitman’s 17-year reign at Lloyds during which his efforts to transform the bank into a powerful profit-generating machine increased its stock-market value 40 times but at the eventual cost of devastating demoralisation of its staff.

Lascelles also describes the attempts to restore the service ethos as a counterbalance to the emphasis on profitability of the 1980s and early 1990s. He notes the emergence of a consensus at the beginning of the new millennium that “if you get your service right, and train your staff well, the business will prosper and deliver value at the end of the day”. But “shareholder value should be the outcome, not the starting point”. I found it difficult not to feel a bit skeptical about this new consensus. Banking seems to follow the cyclical pattern also evident in many other industries regarding the priority accorded to the different objectives of good corporate governance: a period in which shareholders’ interests are underplayed (for the banks that of the postwar cartel) is followed one where managers and investors focus principally on increasing the value of their firms’ shares. The new consensus seems likely to reflect simply diminished emphasis on short-term (as opposed to longer-term) profitability rather than convergence to an equilibrium with a balancing of the different objectives of corporate governance – partly no doubt owing to the lack of an operational consensus as to what such a balancing should consist of.

Reviewers are rarely completely satisfied even with books as successful as this one. As a counterpart to the well chosen illustrations (cartoons and reproductions of banks’ own advertising) I should have liked more statistical information in tabular form both for the commercial banking sector as a whole and for its constituent firms. Under the latter heading it would have been interesting to see some illustrative financial statements for different periods. Lascelles describes the banks’ struggle to avoid revealing their hidden reserves and thus reporting their true profits – a struggle abandoned in the 1970s – and some actual financial statements could have brought issues here into sharper focus.

A subject of which I should have liked a fuller discussion is banks’ cost accounting and the pricing of their services. For industries where a high share of costs is fixed, appropriate cost allocation is a notoriously difficult matter, first attracting the systematic attention of economists in debates over reasonable rates for railroads and utilities in the USA in the late nineteenth and early twentieth centuries. In the banking industry salaries, pensions, equipment and premises constitute a large proportion of total costs. According to Lascelles during the early post-war period the relation of pricing to costs was based on arbitrary procedures: “there was a quarterly ritual when the manager went through the accounts with his chief clerk … and put down figures for charges which were loosely based on volumes, balances and the manager’s feel for how much he could or should squeeze out of each customer … many of the charges were plucked out of thin air”. More recently the greater emphasis on profitability has been accompanied by increased transparency as to the charges of banks’ transactions and services but the book does not take up the question of how these charges are now estimated.

One expects a study of this kind also to follow the historical narrative with reflections on the future of banking. In the introduction Gavin Shreeve, the Chief Executive of the Institute for Financial Services (IFS), hazards the statement that “The only certainty is that the next 25 years are going to look even more different” than the past 25 years. Lascelles himself is more cautious, and his discussion of possible futures relies heavily on interviews he conducted of people currently working in the sector. Whilst his interviewees were prepared to be more mobile than the generations who preceded them, there appeared to be a widespread belief that banking remains a fairly secure career. Drastic changes in institutional forms were not expected, however much operations and services evolve in response to innovation. In his own crystal gazing Lascelles puts emphasis on the likely importance of technology, in particular in retaining customers’ loyalty by giving them the impression that they continue to receive personalised service.

Lascelles does not discuss possible consequences for the new banking world of a major shock to the system which might result from failure of one or more large banks, particularly those present in several jurisdictions, or from other episodes of extreme financial instability. The stress testing carried out by those responsible for the stability of the UK’s banking sector suggests that such destabilisation is highly unlikely, but some scenarios are difficult to simulate so that it cannot be excluded (Bunn et al., 2005). Of greater relevance is probably the impact of progressive globalisation on the future shape of the industry, a subject touched on among the interviewees only in the brief remarks of a senior executive of HSBC which did not go beyond noting the growing importance to banking of the increasing number of wealthy people worldwide and of new customers in the developing world. One would have liked a bit more on the challenges and problems posed by cross-border transactions and presence. Globalisation should be able to accommodate significant international variation in banking operations in response to innovation and local conditions but quite possibly less variation in the corporate and institutional forms within which operations are carried out. Another likely influence on these forms as part of globalisation – and one which may constrain change in banking – will be regulation since both the rules here and their implementation will be affected by pressures for international harmonisation and by the requirements for increased cross-border supervisory co-operation.

The future will of course become history and eventually the subject for a sequel to Lascelles’ book in the IFS series. One can hope that this sequel will match the excellence of its predecessor.

A version of this review was originally published in Journal of Financial Regulation and Compliance Volume: 14 Issue: 2, 2006

Notes

1. According to the OECD Principles of Corporate Governance now accepted as an international standard, “Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined … The presence of an effective corporate governance system, within an individual company and across an economy as a whole, helps to provide a degree of confidence that is necessary for the proper functioning of a market economy”. See OECD Principles of Corporate Governance (Paris: OECD, 2004, p. 11).