Can banks help rescue country without undercutting themselves?
Focused as they are on the economic blow dealt by the coronavirus pandemic, bankers are equally mindful of what came before it and the uncertainties that lie ahead.
As they help battle the invisible demon of the present, they still bear the burden of a decade ago, when they were blamed not only for bringing down the economy and wrecking communities but for recovering on the backs of taxpayers, everyday workers and elderly savers.
This time, bankers genuinely seem to want to be a part of the solution — to help rescue the very people who, many would argue, bailed them out after the mortgage meltdown. Many banks have so far responded to the coronavirus pandemic with relief efforts for customers — including payment deferrals and cheap credit for consumers and small businesses — as well as charitable donations to local health care organizations.
However, bankers also know they will have to answer to shareholders and safety-and-soundness regulators that they did everything they could to preserve their companies from economic harm should the health emergency linger.
The situation is nothing short of “an existential crisis” for banks, said Saule Omarova, a Cornell University law professor who specializes in regulations and banking law. The industry will be forced to prove its worth in the months ahead as the nation grapples with economic hardships caused by the pandemic, she said.
“This is going to put so much pressure on banks to show that when this crisis was going on, they were not abandoning people — their communities, their employees — that they actually made sacrifices,” Omarova said. “We will look at our bankers and compare them to our doctors and nurses who went out and helped other people survive and we will say, ‘What did our bankers do?' "
So far banks are responding to the financial crisis in ways that typically elicit public confidence in the banking system.
Halting share buybacks — a decision made in recent weeks by both large and regional U.S. banks — was one way to show the public that banks are ready to provide credit over the long run, said Nathan Stovall, principal banking analyst at S&P Global Market Intelligence.
But big questions loom: Will top executives take pay cuts to fund the retention of the rank and file? Will they suspend dividends to preserve capital and protect their institutions? How long can they avoid furloughs, job cuts and enduring changes to their business models?
When it comes to compensation decisions, bankers should not forget “the bipartisan fury and popular uprising” that followed when AIG gave senior management a raise in 2009, said Karen Petrou, managing partner of Federal Financial Analytics.
“If any executives are deemed to be living extravagantly while the rest of the country is again facing acute personal hardship, that will not go down well,” she said. “We have had a decade of inequality since the crisis, and the country is even more aligned to be very, very angry.”
CEO and executive pay cuts may be all but inevitable, said Cornelius Hurley, an adjunct professor at Boston University’s Center for Finance, Law and Policy. Though unrelated to the coronavirus pandemic, Hurley said that news of Goldman Sachs CEO David Solomon’s 20% pay raise was “horrible timing” and predicted many CEOs might skip pay raises still to come.
“How can you in good conscience as a CEO be making that kind of money while the entire economy is cratering around you? That’s just beyond the pale,” Hurley said. “You see anecdotal evidence of CEOs giving up salaries or bonuses every day. That just has to happen.”
Indeed, the heads of a number U.S. companies in other industries — including Boeing, Macy’s and Walt Disney — have said they are cutting back or indefinitely forgoing pay as a result of the crisis. Deutsche Bank is mulling scrapping bonuses for top management among possible options to conserve capital, Bloomberg News reported Wednesday.
The roughly $2 trillion stimulus bill puts some restrictions on executive pay at companies that take stimulus money, although those are unlikely to affect banks. For many, forgoing executive pay increases may simply be a matter of good leadership, said Thomas Curry, a partner at the Boston law firm Nutter.
“You need to lead by example, and I think after the last crisis and some of the negative public reaction toward bankers, I think there’s a much greater sensitivity to leading by example,” said Curry, who is also a former comptroller of the currency. “If you were cutting line people’s salaries or hours, then leadership principles would dictate that you share the pain.”
A familiar source gave banks a preview of the backlash that would follow any misstep in the public’s view:
"CEOs and top executives have done just fine in the last few decades, and in a time of crisis, when workers, customers, small businesses, homeowners and other retail borrowers are struggling, CEOs should be focused on helping workers and maintaining payroll — not enriching themselves," said Sen. Elizabeth Warren of Massachusetts, a former Democratic presidential candidate.
Many of Europe’s largest lenders — including Barclays, HSBC, Societe Generale and UniCredit — have already committed to suspending dividend payouts to pad their buffer against anticipated losses. Yet some observers said such moves could hurt financial institutions down the road.
On one hand, some said it may make sense for banks to suspend dividends in the name of capital preservation as long as banks are not totally discouraged from making loans.
“I think that banks are going to need all of the capital they have right now, whether it’s in the form of dividends or stock buybacks or executive bonuses. Preserving that capital, until we know the bottom of this economic crisis, is essential,” Hurley said. “But at the same time, we want them to be lending. … We want the banks to be there when that [loan] demand picks up. Hopefully that day will come sooner rather than later.”
But suspending dividends in order to preserve capital could also backfire and ultimately make it tougher for banks to keep raising capital, said Christopher Wolfe, managing director and head of North American banks with Fitch Ratings.
“The issue with that is, it would not be clear to investors whether it’s a PR move or a capital preservation move and in some ways they might not care,” Wolfe said. “If investors can’t determine whether this is for capital preservation or just a PR move that will create a problem in and of itself.”
He added that some investors are actually prohibited from owning stocks that don’t pay dividends, so while banks could cut dividends, cutting them to zero “will have some very serious implications.”
Pressure of the moment
It is unclear right now whether banks are doing enough for their communities while also preserving the long-term health of the industry, many observers said. Much of that answer will depend on how long the pandemic and corresponding social distancing measures last.
Lawyers who advise community banks say that even before the stimulus deal passed, they were fielding calls from clients wanting to know how to handle payment deferrals and other customer relief efforts. Banks are doing all they can to help their customers and communities while still continuing to run safe and sound businesses, they said.
“Our clients are obviously nervous about all the laws and rules, but the kind of crisis we’re in now requires that people become focused on their role as good corporate citizens and do the right thing,” said Kenneth Ehrlich, a partner in Nutter’s banking practice. “I think there’s a heightened focus on trying to essentially fulfill your role as a key player in the communities and serve as a support mechanism.”
To be sure, some bankers have warned that overburdening businesses and consumers with debt could be harmful in the long run.
“So it’s really . . . walking that fine line of being as supportive as we can be, but at the same time not in any way calling into question the safety and soundness of our institution or of the system,” Citigroup CEO Michael Corbat told the Financial Times last week.
Rosa Alina Pizzi, a lawyer at Phillips Lytle in Buffalo, N.Y., said she has been working with bank clients to understand how they can take advantage of lending programs in the relief plan in order to get funding to businesses in need.
But there is so much uncertainty that, even with a stimulus package, bankers are uneasy.
“The biggest thing I’m hearing is, ‘How long is this going to last?’ and I think that’s really driving the response,” Pizzi said. “If it’s something that lasts a couple months, that’s going to have a very different impact than something that extends throughout the fall … If it’s really long-term, if factories aren’t operating and if borrowers aren’t generating revenue for a long time, that’s making bankers nervous.”
Stanley Ragalevsky, a lawyer at K&L Gates in Boston, said many community financial institutions will certainly want to participate in the consumer and small-business relief programs. But he also said bankers need clarity, particularly from their trade associations, about how to handle those appropriately.
“I think banks have to be very careful about this and understand what they’re getting into,” he said. “The thing that would be the most useful would be if the industry resources and federal organizations help these banks and credit unions. … What they’re looking for is guidance.”
Again, the lessons of the financial crisis will form the yardstick by which the industry’s performance is measured.
Richard Lawson, who headed up the consumer protection division in the Florida attorney general's office in the wake of the foreclosure crisis and is now with the Tampa, Fla., law firm Gardner Brewer Martinez-Monfort, said how much banks do to help consumers as this crisis unfolds will be graded against past enforcement actions like the 2012 settlement that the Justice Department and 49 state attorneys general struck with mortgage servicers.
"You can be assured that if a company has abandoned those practices there will not just be a short leash, there will be no length of leash, there will be an incredible lack of patience by the enforcers," Lawson said.
In the meantime, bankers are doing everything they can to reassure workers that they have their backs even as they have to close branches for public health purposes and shift more services to phone and digital services.
Bank of America, Citigroup and Morgan Stanley, along with European counterparts including HSBC Holdings, have pledged to preserve jobs amid the widespread impact of the coronavirus.
“We don’t want our teammates to worry about their jobs during a time like this,” BofA Chairman and CEO Brian Moynihan told CNBC last week in pledging not to lay off any workers this year. “And we’ll continue to pay everybody, even those who can’t work from home.”
But some say further reduction of retail branch networks, which have been shrinking for years, may be necessary. While banks have temporarily closed branches to reduce the spread of COVID-19, some may make closing permanent to keep costs down.
“Some might find the need to maintain those networks, but I think some will realize they don’t need quite the footprint they used to have,” Stovall said. “I think they’ll look more closely as, ‘Do we really need [these branches]?’ ”
As Wolfe put it: “In the longer run, if more and more people then turn to online channels for their banking, I think this just accelerates" the move away from branch banking.
Ragalevsky said branch closures could have an outsize impact on smaller banks and credit unions, which may not have as many online and mobile banking options as their larger counterparts.
“The greatest strength that community based financial institutions have is the fact that there’s someone you know you like, you can go down and talk to them and it’s that personal social relationship,” Ragalevsky said.
“Now we’re looking at a situation where that relationship doesn’t seem to be as important as protecting your own health.”
Experts agree that what comes next for the banking industry remains largely dependent on the severity of the crisis. A three-month disruption of the economy is much different than six, nine or 12 months. And decisions could become a lot more about complicated than the size of the branch network.
Cristian Tiu, chair of finance at the University at Buffalo School of Management, said the longer the economic turmoil goes on, the more likely that all banks will have to adjust their business models.
“Imagine something that goes on for a couple of years,” he said. “It won’t matter what banks want to do to create good PR. At some point that business model will be unsustainable, and they will have to cut dividends, and they will have to cut pay, and they will have to let themselves be acquired by other institutions. I don’t think we’re in that worst-case scenario at all, but on the other hand, I don’t think we see the light at the end of the tunnel just yet. It all depends on how fast this unfolds and get resolved.”