(A version of this article was originally publshed in Minyanville)
By Peter Atwater
All I could think reading the expletive-laden quote from an unnamed Standard Chartered (SCBFF) executive this week was the scene in the Treasure of The Sierra Madre where they say, “Badges? We don’t need no stinking badges!"
Talk about a case study in what not to say during a period of weak social mood.
What the unnamed Standard Chartered executive and many of his brethren still don’t get is how social mood and regulation tie together.
During periods of rising social mood we scrutinize less and we strive for uniform regulation. That Glass Steagall was repealed and Basel capital rules came into existence at the peak of the markets and social mood at the end of the 1990s was no coincidence. History repeatedly shows a pattern of weakening regulation during rising markets, with the reverse during and just after significant market declines.
For Standard Chartered, like all banks, banking regulation is greater today than anything they have seen in recent times, and unless mood improves significantly — and soon — operating conditions will only become even more supervised.
But there is another important element to deteriorating social mood which the folks at Standard Chartered have really missed, and that is the concurrent fragmentation in public sector leadership that occurs.
A few weeks ago, I offered this chart, and suggested that during the late 1990s you could use the term “European leadership” without hesitation whereas today the question of who is in charge seems to change by the moment. (And memo to Italian Prime Minister Monti, for reasons made obvious by the chart below, now is really not a good time to be criticizing national parliaments.)
Looking at the current state of events in the financial services space, let me now offer this comparable image:
To be clear, I didn’t have room for all of the possible names you could put up. Arguably, the SEC, the CFTC, Homeland Security, the Secret Service, and the executive and judicial branches of the federal government (and state governments) all probably belong on the image as well.
Further, this is just looking at the United States. Thanks to falling social mood worldwide, there are arguably similar regulatory leadership “constellations” to this now forming all over the globe and which impact transnational financial institutions. Everywhere I look leadership is fragmenting, if not atomizing.
For financial institutions like Standard Chartered that have been growing the geographic and organizational complexity of their businesses over the past 50 years with the hope of greater and greater global regulatory uniformity and operating seamlessness, these increasingly fragmented regulatory-leadership constellations pose an enormous challenge.
Compliance is now entirely situational–determined when, where, and by whom at a moment’s notice.
But there is one final social mood element that global banks like Standard Chartered need to appreciate, and that is how nationalism increases as mood falls.
Last week, The American Banker ran an op-ed entitled “Let’s Invite HSBC to Leave US” in which Andrew Kahr, the founding chief executive of what became Providian, offered this thought regarding HSBC (HBC):
Now it's moving its center of gravity back towards Hong Kong, so HSBC will become increasingly a Chinese bank—under the sway of the Chinese government, like all Chinese banks, no matter who owns them. HSBC already has become the largest international bank in China.
China, like Russia, still lacks a domestic bank with international reach. HSBC can be the first. Get it out of here before that happens… With the colonies gone, let HSBC returns to its Chinese nucleus. Good riddance.
Let's get and keep HSBC out of here.
I don’t pretend to know at this point how deeply Mr. Kahr’s opinions are shared by others, but looking at what I see in Greece today, there is no doubt in my mind that anti-immigration sentiment and weak social mood closely correlate. (And needless to say I would not underestimate the potential now for regulatory retaliation aimed at US-headquartered banks operating around the world. In an environment of weak social mood, hell hath no fury like a “national” regulator blind-sided by a “foreign” counterpart.)
Together, however, mounting and deeply-customized location-by-location regulation, fragmenting public sector leadership, and a rising tide of nationalism represent a trifecta of gale-force headwinds for the world’s largest banks.
From my perspective, banking leaders, boards of directors and shareholders would be wise to accept that this storm is unlikely to soon pass. If anything, falling mood will only magnify the strength of the headwinds, and banks will be forced to adapt to this new hostile environment.
Given the current social mood, if I were a bank, I’d batten down the hatches and quickly head back to port.
Peter Atwater is President of Financial Insyghts LLC., a consulting firm to money managers, corporations, and policymakers on how social mood affects decision making. His new book, Moods and Markets, is available for presale.
(Photo courtesy of Sam Kelly)