Change is a universal constant. For philosophical fineries adorning the ‘change is eternal’ concept and for musings on the durability of change, see classical works, beginning with the fragments that remain of writings by eastern Mediterranean thinker Heraclitus.
In the real life experience of pressure for change, the global banking industry has been flooded with existential challenges related to the Great Recession, which was to a significant extent triggered by bankers’ reckless risk taking and their own hubris in the engineering of incomprehensible securitization instruments.
The global recession resulted in sweeping changes that were forced upon the financial game over the past seven to eight years: measures ranging from Dodd–Frank and Basel III reforms and the stress testing of systemic banks, to the hyper scrutiny of banks’ compliance with cross border taxation rules and politically determined behavior standards. Change, in summary of the contemporary global banking industry experience, thus was recently intense, multi tiered and intrusive.
For Lebanese banks, the experience was more nuanced. Different from the upheavals elsewhere that swallowed entire banking groups, the sector’s conservative culture and intense guidance by Banque du Liban insulated Lebanese banking from the global risk swamp to such a degree that many local bankers or economists would emphasize that banking in so called developed economies could take lessons in prudence from Lebanon.
In total, no Lebanese bank was swallowed by the subprime bog or any other sinkhole of the global financial crisis. Even in the country’s one large financial mess of the past several years — the indictment and dissolution of Lebanese Canadian Bank — the final settlement was regarded by the Lebanese shareholders and the former bank’s management as an absolution from culpability.
In more recent experience, a fine levied against Bank of Beirut’s UK subsidiary read much like an admonition against handing the teacher a poor excuse for not doing a class assignment, not comparable in any way to the multi billion dollar severe violations and deceits which institutions the likes of Barclays, UBS, Citi, Deutsche and HSBC — to mention but a few — were party to in London interbank offered rate (Libor) manipulations or assistance to criminal, big ticket tax cheats.
This is of course not to paint any undeserved halos around the heads of Lebanese bankers. Governance in the sector and its public transparency are both still mostly amiss, and the best and brightest local bankers utilize disinformation in their communication as well, and as avidly, as the next person. But when seen in the context of a global financial industry that is as far from perfect as the lord of La Mancha is from his unreachable star, the Lebanese banking province represents a surprisingly bright spot — and not only because of its vital role for financing the country’s public and private sector needs.
It must further be noted that the Lebanese bankers recently have had a lot on their plates. Firstly, requiring substantial investments and organizational adjustments, the internationally imposed new compliance regime was a major disruption. Banks and the Association of Banks in Lebanon (ABL) thus in the past three or four years were greatly preoccupied with training for and implementing the new rules.
This important exercise was secondly not helped by the regional and internal pressures on the Lebanese economy, which effectively constituted real life stress testing that the banking industry had to withstand. And, as shown in the results for each of the past three years — perhaps especially in the profits achieved in 2014 — the sector has so far passed the tests every year.
Banking for change
On the other hand, the Lebanese banking system is exhibiting sclerosis. The industry’s structures appear to have hardened in several respects that imply a new need for multi tiered change. One such indicator of structural sclerosis is related to the immense importance of Lebanese banks in keeping the economy above water. Top decisionmakers at several alpha banks, along with central bank chief Riad Salameh, regard no individual bank — but rather the entire sector — as systemically important. This correctly reflects the national situation, diagnosed time and again by multilateral financial institutions and countless analysts, whereby the Lebanese structural dependency on capital inflows for financing the current account deficit correlates with the domestic banking sector’s crucial importance as an investor in public debt — and its high exposure to sovereign risk.
This collective systemic importance of Lebanese banks is grounds for concern, because it causes resistance to change. No single bank could be allowed to fail and banks need to stick together, sector members argue, because even a minor and badly managed bank’s commercial failure would scratch the vitally important confidence in the sector. The assumption has not been tested in the past decade by allowing a bank to crash, and while it may be true, the codependency of banking and sovereign needs remains as concerning as it was when ratings agencies started evaluating the first few Lebanese banks in the mid 1990s.
Banks, as we all know, have profited quite handsomely from lending to the sovereign. Notwithstanding continuous attempts at diversification and growth into new markets, the sector still derives most of its profits from Lebanon, and no one seriously expects that T-bill transactions will cease to be the sector’s main profit engine anytime soon.
The codependency has worked, but it came at a huge economic cost to the people of Lebanon. Banks on the whole, on the other hand, had no sector engulfing incentive to change their profitable reliance on the existing system and the underlying monetary regime. But believing the system to be infallible is an unending gamble and, unless preparations for a transitioning into a real monetary policy are tackled, a deep disruption of the current national financing mode would be fatal for the Lebanese economy.
Some suggest that the transition into a real and independent Lebanese monetary policy should happen after fully achieving national security, implementing fundamental reforms under the constitution and advancing to a well measured political situation. To make something of life one does well to aim for ideals but, given the probability of achieving any of these preconditions, the question arises if that would mean a postponement of a needed transition or a flight into utopianism.
It bears repeating that Lebanese banks have proven abilities to deal with and implement change. Current demands for change are not imposed by regulators but by technology innovations and customer demographics (see “The banking turnover“). These market demands speak to the need for fundamental transformations of banking cultures in a similar intensity as we experienced last time in the new economy days around the turn of the millennium.
Some banks are acting faster and smarter than others in aligning their cultures with these market needs, reminding us that while change is based on necessity, it also requires passion and insight. Passion for smart and valuable change is an attitude that Lebanese banking sector stakeholders, from the policy leaders and the ABL, to individual bankers, are not only well advised to focus on. It is a need for being sustainable as an industry and as institutions.
It may very well be true that people — more specifically us 90 plus percent who are non bankers in Lebanon and a vast majority of the world’s ‘99 percent’ in general — are “not sufficiently aware of the importance of the role of bankers in promoting economic development and creating jobs by converting savings into investments.”
This perception of the chief strategist of our country’s by far largest lender means that Lebanese banking — to be understood for being worth more than just money, on top of all other change needs — also has to adjust to the task of building a new global framework for sustainable development through 2030 that the International Monetary Fund last month highlighted in the closing communiqué of the 2015 Spring Meeting. In a nutshell, banking for profit must be banking for inclusion.
A dose of utopia is part of having the strength to aspire for great and meaningful changes in anything. And utopian as this may be, this means not just change in banking, but banking for change.