Banking and the paradoxes of risk communications
The recent banking crisis has raised a whole host of issues around the public’s lack of trust in government and public authorities, crisis communications, what corporate responsibility can do, politics and regulation.
There is the paradox that it was only when the Bank of England, FSA and the Treasury put out a statement saying that all was well and that they would provide liquidity to help Northern Rock that there was a run on the bank. Northern Rock customers weren’t aware of the seriousness of the problem until they were told by the authorities that there was nothing to worry about! The fact that the authorities had made a statement sent the unintended message that it really was a serious crisis. So off they went to withdraw their savings.
This phenomenon is linked to the old question of whether the panic caused by making a public announcement about a crisis may cause more problems than the crisis itself. In the old days, a lot of things were swept under the carpet and nobody was any the wiser. That approach wasn’t necessarily ethically robust, but it probably worked in some cases and avoided a panic. But now with the internet, 24 hour news, social media, blogs etc, the authorities have no choice but to communicate publicly and swiftly and quite right too.
It is a long term trend that the public trust government and regulators less and less. In some cases, this reflects a positive development in that deference is long gone and consumers are now rightly questioning things in a way that they may not have done 30 years ago. This has been compounded in recent years by a range of disasters where the public has seen the ‘experts’ get it wrong – e.g. BSE – or have been treated less than perfectly by the financial services industry – e.g. Equitable Life, pension mis-selling or endowments.
But it is also a very simple human instinct. If your savings are in an institution that is clearly under threat and you can go and get them out, do you really trust the authorities totally and leave them in? The question of ‘what if’ nags away at you as you know you would regret it if for some reason the bank and the authorities let you down.
The spotlight has been shone on the compensation scheme for investors. It turns out that if the bank does go down, you only get 100 per cent of your savings up to a maximum of £2,000 and then 90 per cent for the next £33,000 and you might not get that for six months. (In the US, you would be likely to be able to get your money in one day as it would be transferred immediately to another bank.) Maybe those customers in the queue have a point.
This all led to the extraordinary statement that government would guarantee those Northern Rock savings and those from any solvent bank. Clearly government, the FSA and the Bank felt that drastic times meant drastic measures. One of the potential political consequences was the possibility of Labour’s cherished reputation for financial and economic competence disappearing with the customers’ savings, while the opposition parties were circling in an attempt to capitalise.
Some argue that this crisis, FMD and the recent reduction in the Brown bounce in the polls have probably rendered the chances of an autumn election at close to zero. If that is the case, then we are back to May 2008 or May 2009 as the front runners. But the ICM poll on 19 September gave Labour a prominent lead despite Northen Rock and the crisis has abated since then. Gordon Brown will decide on the basis of private polling, published polls, the position in marginal seats, the latest position in Scotland and Labour’s ability to fund a general election campaign when it is so much in debt.
Then there’s the important question – where’s Gordon? For FMD, floods and terrorist attacks he was everywhere. On a banking crisis, he’s too busy having tea with Margaret Thatcher (that’s another story) and he leaves it all up to his Chancellor.
He has always had a strong tendency to lead from the front on good news stories but leave others to face the music when things have gone sour – think of Dawn Primarolo having to cover for him for years on the working families’ tax credit fiasco. But to be fair, floods and FMD were hardly good news stories and for a banking crisis, the Chancellor should be in the lead. Similarly, you can’t criticise him for failure to trust others and delegate and also criticise him for delegating too much. But could he be unwilling to be associated with a financial crisis when his reputation was built up around avoiding any economic crises when he was in Number Eleven?
A less remarked on area of this particular issue is the role of corporate responsibility in helping Northern Rock during its time of need. Strong local and regional roots, the massive investment of the Northern Rock Foundation in local charities and major sponsorship of all sorts of institutions in the north east (including Newcastle Utd), have all helped Northern Rock retain huge goodwill during this crisis. The local paper is running a major campaign encouraging readers to buy shares in the bank and to continue saving with it.
While goodwill won’t save the bank on its own if the finances fall apart, there can be no doubt that Northern Rock is in a better position than it would have been had it had the public support of say, for example, the private equity industry. One of the business benefits of corporate responsibility is that you are more likely to be given the benefit of the doubt by your customers and other key audiences in a crisis. This is a classic example of that.
And finally, the questions for the regulators. How has the system coped?
Well the Bank of England had been resisting the temptation to bail out the wholesale markets from the consequences of their own failed high risk investments. But they have had to stand behind Northern Rock whose recent aggressive strategy has totally backfired and then they reversed their opposition to providing liquidity in the markets and accepting mortgages as collateral when they had criticised the ECB and the Fed for doing exactly that. If the Bank had done it earlier at the same time as the other central banks, there would never have been a Northern Rock crisis. Similarly, if it had allowed a takeover Lloyds TSB, there would not have been the first bank run in the UK since the nineteenth century. And shouldn’t the FSA and the Bank have spotted further in advance that Northern Rock was too reliant on the capital markets when there was the possibility of a squeeze on liquidity? It is not good enough for Mervyn King to balme legislation as he did before the Treasury Select Committee. Why didn’t he raise that problem before? The renewal of his term next year must now be in some doubt.
An extraordinary episode. It will probably be – as the BBC’s Nick Robinson suggests in his blog – more like the fuel protests in 2000 and therefore a temporary issue than like Black Wednesday which destroyed the Tories’ reputation for economic competence for years. But this financial crisis has some way to run, and if the real economy is affected then we will all have cause to moan about poor banking practices.