With additional reporting from Dominic O’Neill, Lucy Fitzgeorge-Parker, Peter Lee and Elliot Wilson
"We’ve been through 9/11, Sars, Ebola, acute crises in different regions of the world and of course the 2008 financial crisis,” says Anne Finucane, vice-chairman at Bank of America and head of its environmental, social and governance committee. “We are adequately prepared to weather this pandemic from a capital and liquidity perspective. But none of us have experienced the magnitude of this pandemic.”
When Euromoney talks to Finucane on April 23, it is just a month after the first US state, California, issued stay-at-home orders. What feels like a lifetime is really only what has been called the ‘early innings’ of the Covid-19 pandemic and its subsequent economic fallout.
“No one can be fully ready for something like this,” says Finucane. But, she continues, “there have been dress rehearsals for this moment.”
Anne Finucane, vice-chairman at Bank of America and head of its environmental, social and governance committee
She is referring to BofA’s responsible growth principles that were set in 2014, but that have driven the bank’s strategy since the financial crisis under chief executive Brian Moynihan.
Finucane ticks off all the bank has achieved over the last decade in addition to higher capital ratios: a $20 US hourly minimum wage; employee diversity; pay parity; “a doubling down on technology and a jettisoning of certain business lines”; greater financing of affordable housing; increased lending to women and low-to-moderate-income communities; issuance of green bonds and underwriting tax equity products; and renewables financing.
In the middle of a crisis, each one of these commitments has helped with the bank’s response and resiliency, says Finucane.
Indeed, Moynihan has emerged as a spokesman for the industry in the US during this crisis, perhaps because of his long-term focus on responsible banking. He has been public about the commitments the bank is making to charity, its employees and to its clients.
He has advised non-customers to stay with their current bank so that they can be served more quickly by a business with which they already have a relationship, rather than trying to join BofA where they won’t be in line for loans – as well as assuring them they can cash their cheques for free at BofA branches.
It’s not just BofA that has been prepared to respond to the crisis.
It’s been encouraging to see the spirit of ‘let’s do what we need to do and what we can do, and we will deal with our problems when they come- Simone Dettling, PRB
Since 2008 banks around the world have invested resources in supporting the health and wellness of employees, improving their connections with their communities, creating products that better align with the social and environmental values of clients, reducing finance to environmentally destructive practices and developing tools to better support the financial health of the communities in which they operate.
This is responsible banking – stakeholder capitalism, if you prefer – and the world’s largest banks got on board before the coronavirus crisis. They had to after the battering their reputations took during and after the financial crisis.
Banks have since cleaned up their shops, not just because regulators have demanded higher capital ratios but because society has insisted upon it.
Indeed, every stakeholder has demanded banks take steps towards becoming the responsible stewards they were always supposed to be. Flanking those steps have been statements of purpose, announcements of principles, initiatives, examples of ‘good deeds’ dotted throughout annual reports and endless press releases.
A healthy air of mistrust remains, however. Society has never really known whether or not bank efforts ranging from diversity to environmental policy were anything more than window dressing. But in a pandemic, they are being called upon to act, alongside hospitals, emergency services, food suppliers and distributors, because of their essential role in the economy and society.
Every one of their stakeholders needs them – governments included.
It is the greatest test to date of what responsible banking means in practice. And it is demonstrating why responsible banking was never just a ‘nice to have’ but absolutely critical.
Principles for Responsible Banking
At the end of March, as the coronavirus was claiming thousands of lives a day across Europe, the Principles for Responsible Banking (PRB) group called on its signatories to explain how they were responding and to create a database of their actions.
The PRB, part of the United Nations Environment Programme Finance Initiative, was launched in September last year with 130 banks (it now has 175 signatories) from around the world, who signed up to six principles.
Those principles include alignment with the UN Sustainable Development Goals (SDGs), the Paris Climate Agreement and national sustainability frameworks, and a commitment to transparency and to serving all stakeholders responsibly.
It is not another woolly initiative with good intentions and little substance. To be a signatory requires impact analysis, self-reporting and assessment.
We have a formidable opportunity to demonstrate that responsible banking can be much more than a slogan. We can make it a reality- Frédéric Oudéa, Societe Generale
More than 150 banks joined PRB’s first Covid-19 call, most were particularly keen to hear from the Chinese, Spanish and Italian banks that were further along in the progress of the outbreak.
“It was clear how seriously banks were taking their roles,” says Simone Dettling, who runs the PRB. “In many cases they are going beyond what governments were asking of them when it came to supporting small businesses, as well as the millions of newly unemployed.”
The Spanish banks exemplified this point, promising domestic small and medium-sized enterprises, and the self-employed tens of billions of euros of additional working capital loans at their own risk a week before prime minister Pedro Sánchez announced a €100 billion programme of state-guaranteed business loans.
A total of €100 billion has been committed by the Spanish banks, including €20 billion from Santander and €25 billion from both BBVA and CaixaBank.
Antoni Ballabriga, global head of responsible business at BBVA
“This was and is a key moment for banks to show how they can help societies during the collapse of an economy,” says Antoni Ballabriga, global head of responsible business at BBVA. “Maintaining continuity is a critical part of that.”
To maintain continuity, banks have extended their own loan commitments, in addition to channelling government loans. They have also relaxed loan, credit card and mortgage repayments, as well as offering moratoriums.
There are many examples.
Singapore’s DBS Bank is letting holders of credit cards roll repayments into a single loan that slashes rates from 20%-plus to the high single digits. The Netherlands’ ABN Amro has offered an automatic six-month deferral on payments from commercial clients with a credit facility of up to €50 million.
Barclays has waived overdraft fees, among other provisions. Italy’s UniCredit has put in place an extension of credit for imported goods of up to 120 days to support working capital management. In Peru, BBVA helped with the distribution of a social bond for vulnerable families.
Such efforts have required even closer relationships with regulators and governments, as Dettling points out.
“In the UK,” she says, “banks were asked early on to help the UK government as quickly as they could. In Switzerland, regulators worked with banks to get out loan extensions and loans, so that businesses could fill out an online form and, if approved, the money would be in their account the next day.
“Likewise in China, banks worked with regulators to fast track loans and extensions; and in South Africa the banks were allowed to instead adopt ‘opt-out’ models so that all qualifying loans would be extended. No one had to even fill in a form.”
In the US, banks have been the predominant channel for the federal government’s now $659 billion aid programme for small businesses – the Paycheck Protection Programme.
US supervisory agencies have also allowed banks to dip into their capital buffers and continue lending without facing regulatory sanctions.
But being the distributors of money to businesses and retail customers in a crisis is a double-edged sword for banks. On the one hand it underlines the importance of the banking system for society and offers banks the chance to overturn negative opinion. On the other, with so much at stake, there is plenty of room for disappointment and criticism.
In the UK, banks are being criticized for their slow progress in disbursing the coronavirus business interruption loans scheme (CBILS), which is 80% underwritten by the UK Treasury.
In the US, some banks are being accused of giving corporate or private clients preferential access to loans – largely because the volume of loans to these segments is smaller and therefore quicker to process than is the case for the retail sector.
There are technical and practical issues in dealing with the administration of these schemes, which have not yet been really well thought through- Bernhard Spalt, Erste Group
Bernhard Spalt, chief executive of Austrian bank Erste Group, which has a large network across emerging Europe, says there are challenges in helping deliver government support to clients.
“Politicians want to tell the public and their voters that they are responding quickly and in size” he says. “The question is: how do we translate these large numbers into money which is available to customers and helps them survive?
“If the money is not being provided very quickly, it’s not because banks don’t want to lend, but because there are rules to follow and it takes time to set up the necessary frameworks,” he adds. “There are technical and practical issues in dealing with the administration of these schemes, which have not yet been really well thought through.”
Spalt worries that this could lead to a longer-term backlash against banks, negating the positive sentiment they have worked to build.
Johann Strobl, chief executive of Raiffeisen Bank International, shares Spalt’s concerns: “Once governments announce support packages, customers want to see the money on their account the next day.”
He fears banks will be held responsible for the inevitable delays: “Since the financial crisis, it has been easy to blame banks for everything.”
Where the banking industry cannot be criticized during this crisis is over how it has managed its employees.
“Our first priority has been about taking care of our employees and making sure they are safe and healthy,” says BofA’s Finucane.
“Given we are an essential service, we have frontline employees out in branches,” she continues. “We also still have traders who have to come in to the trading floors so that global liquidity is supported [around 15% of the bank’s employees are not working remotely].
“The first actions we took were making sure everyone could keep a physical distance from one another, that there was plexiglass to keep the tellers safe, for example, and that all staff that needed them had masks.”
That was no small feat when protective equipment was hard to come by.
Banks have also ensured employees do not have their own financial concerns to compound the stresses of new working arrangements and lockdowns. Many firms across the world have said they will not lay staff off this year; Societe Generale has said there will be no redundancies during the crisis.
Frédéric Oudéa, CEO of Societe Generale
Chief executive Frédéric Oudéa says: “We have a formidable opportunity to demonstrate that responsible banking can be much more than a slogan. We can make it a reality.”
Some banks have also provided extra money to those that may need it. Citi announced that it is giving employees that earn less than $60,000 (or the regional equivalent) $1,000 each to help them cope.
There has also been indirect financial assistance: some banks have provided computers for employees working from home, as well as offering much needed mental health support.
Lloyds Banking Group, for example, has 800 internal mental health advocates currently offering weekly support sessions, while employees also have access to trained specialists.
At BofA, free access to therapists and counselling using Teladoc has been rolled out for employees in the US until the end of May.
To keep social connections and motivation going in the new work-from-home environment, banks have also supported Zoom coffee mornings and happy hours, as well as online yoga and mindfulness classes.
It’s a compassionate commitment from the banks, but also a necessary one for managing productivity.
As DBS Bank, chief executive Piyush Gupta asks: “How lonely do people get, how do they feel being at home all the time, about being part of a team, about company loyalty and culture? The vast majority of DBS employees we surveyed feel more productive working from home – but will that remain true after four or five or six more weeks?”
What has been clear from this crisis, however, is that those banks that have had responsible employee policies in place for longer have found it easier to anticipate and to respond to employee needs than those that have not.
Nothing underscores the small size of the universe as much as this crisis, and it’s very clear we are only as strong as our weakest health systems- Phyllis Costanza, UBS
Both BofA and Lloyds, which are known for their diversity and inclusion, report that in some ways it has been “business as usual” – that employees know where and how to reach out and that many were already using the services, such as counselling or wellness tips, before the pandemic hit.
At Santander, Victor Matarranz, global head of wealth management and insurance, is now charged with leading the group’s response to the coronavirus crisis. He says that the bank’s efforts to push flexi-working over the last two years have enabled a smoother switch to remote working.
“There is no doubt that the work we have done around work/life balance has helped us respond to employees quickly during this crisis,” he says, “not to mention being able to have as many as 780,000 video conference connections a day.”
Meanwhile large donations from banks – often led by executives – have boosted employee morale.
For example, UBS’s group executive board is donating 50% of its base salary over the next six months to Covid-19 relief efforts, ranging from local hospitals and food banks to charities working to prevent domestic violence.
UniCredit’s chief executive, Jean Pierre Mustier, after foregoing a bonus of up to €2.4 million for 2020, is cutting his salary by a quarter this year, allowing the board to donate €2.7 million to the UniCredit foundation to support social initiatives.
In Spain in late March, Santander executive chairman Ana Botín and her board took a pay cut that will be used to seed a fund for medical charities. Within days that fund was responding to urgent calls for money for a field hospital in Madrid.
“Responsible banking today requires us to do everything we can to try to save lives,” says Botín. “One of the other reasons why we took the pay cut is because, in order to help others, we couldn’t just take more shareholder funds. We thought that the right and responsible way to help others was by reducing pay and using our network and procurement power in trying to buy masks and supporting efforts of governments and local authorities.”
Everything we have learned over the last 12 years has been applied during this crisis, and hopefully we are demonstrating we are worthy of the role we are now playing- Anne Finucane, Bank of America
To support employee giving, banks are offering to match employee donations.
BofA has lowered its matching gift minimum from $25 to $1 to increase the impact of every employee donation up to $5,000 a year.
UBS’s Optimus Foundation is matching both client and employee donations at 100% until further notice.
BBVA is also matching its employees’ donations to purchase healthcare materials, support vulnerable communities and research a cure for the disease. It has raised €2 million so far, and joins the €35 million that BBVA had already announced that it would contribute to fight the pandemic.
Donations were quick in coming from banks around the world. JPMorgan Chase offered $15 million in immediate aid and $35 million to be deployed to support an economic recovery. Citi offered $30 million, as did UBS.
Phyllis Costanza, who is head of UBS in Society and chief executive of the bank’s Optimus Foundation, says this is where experience in working with non-profits pays off.
“This isn’t a sideshow for us,” she says. “From all the philanthropic work we have carried out for our clients, we know where the money can be best put to use and what the organizations are that can best do that.”
Over the crisis, Costanza says, UBS has hosted webinars with external experts, including Nobel Prize winners with expertise in poverty through to healthcare, presenting to employees and clients to help frame thinking around how best to serve in the crisis.
“We are trying to be thoughtful about not just helping with immediate needs but preparing for the longer-term impacts,” says Costanza. “Similarly we are looking not just in our own backyards but in countries we don’t even operate in as a bank. Nothing underscores the small size of the universe as much as this crisis, and it’s very clear we are only as strong as our weakest health systems.”
So far UBS has raised more than $6 million from clients, with twice that amount more promised.
Costanza makes a broader point, however, about how banks must look at their community stakeholder responsibility: “We have seen a lot of corporate citizenship and corporate responsibility coming out of our sector, but the question needs to be: what was the real impact of that programme? Did you really make a difference or was it just for the headline?”
Costanza says impact measurements need to become part of corporate responsibility and that this crisis is a good time to double-down on that commitment.
UBS, for example, is one of the few financial institutions to be ISO 14001-certified, meaning it is audited every year to assess its environmental impact on society, in addition to reporting on the more traditional standards set by the Sustainability Accounting Standards Board and the Global Reporting Initiative.
Dividends and buybacks
For several years, bank chief executives (some more than others) have tried to hammer home the point that shareholders are one of many bank stakeholders and have insisted decisions are not based on profits alone.
Last August, the US Business Roundtable, which represents the chief executives of 192 large US companies, including BofA, JPMorgan, Morgan Stanley, Citi and Wells Fargo, released an updated ‘Statement of purpose of a corporation’.
The new statement read: “Business leaders should commit to balancing the needs of shareholders with customers, employees, suppliers and local communities,” as opposed to the statement from 1997, which said: “The principal objective of a business enterprise is to generate economic returns to its owners.”
The transition of banks from one goal to another has not always been particularly convincing. But, under guidance from regulators and central banks, banks in Europe at least have done the unthinkable: they have postponed dividends and buybacks.
Asked by Euromoney how shareholders had responded to the decisions, those that responded said they had been largely supportive.
Barclays, Santander, Lloyds, RBS, Standard Chartered and HSBC will not be paying dividends in 2020 after the Bank of England’s Prudential Regulatory Authority urged UK commercial banks to preserve capital to support the economy
Switzerland’s financial regulator Finma also urged dividend curbs; both Credit Suisse and UBS have delayed 50% of their dividends.
The European Central Bank ordered eurozone banks to freeze dividend payments and share buybacks, as have the zone’s individual regulators. BNP Paribas, CaixaBank, UniCredit, ABN Amro and ING are among those that have taken action to cut dividends.
The aim is to “keep precious capital resources within the banking system in these difficult times,” said Andrea Enria, chair of the supervisory board of the ECB in a blog.
It has been a different story in Asia. Some of Australia’s biggest banks have pushed back against regulatory advice to cut dividends for fear that it would send bearish signals to the market. In Singapore, DBS’s Gupta, also dismisses dividend cuts.
“If this is a multi-year problem, then they will be more significant. At that point, banks will likely get to the point where they can’t pay dividends,” he says. “But promising now to not pay them is, to me, illogical.”
There is only so much banks with good capital and liquidity can do to stem the tide- Matthew Blake, World Economic Forum
In the US, the action lies somewhere in between the two. Banks have suspended buybacks, but so far, pressure to reduce dividends has not come from the Federal Reserve itself – although former Reserve chair Janet Yellen has suggested it, as has Neel Kashkari, president of the Federal Reserve Bank of Minneapolis.
The argument against doing so, other than not wanting to set markets in panic, has been that US banks are better capitalized than their European counterparts, and halting buybacks has a greater impact on pay-out ratios than in Europe.
But in the US, banks say their relationship with shareholders has changed during the crisis.
“Our regular conversations with institutional shareholders focus on performance, and they will also ask about our commitments to responsible growth and the SDGs,” says Finucane. “But now 80% of our conversation is related to the pandemic and what we are doing for employees, how we are implementing the federal programmes, how we are helping customers through loan, mortgage and credit card payment deferrals, and our philanthropic work.”
Essentially what shareholders want from their banks right now is for them to act responsibly for and with all their stakeholders. That could well be because banks that behave responsibly – or sustainably – are commanding a better share price.
Research commissioned by the Global Alliance for Banking on Values last year showed that, from 2007 to 2017, banks that consistently scored high on material ESG issues delivered higher risk-adjusted returns compared with those banks that performed poorly on the same issues.
It was the first data insight to suggest responsible banking pays off – which could mean that all stakeholders’ interests can finally align.
But is it really possible to serve the disparate stakeholders? The PRB’s Dettling is realistic.
“It’s never possible to please all stakeholders at the same time,” she says. “During this crisis, we’ve seen some interesting trade-offs that all stakeholders have had to make.”
She points to regulators having to ease strict criteria for credit approval and South African banks delaying loan repayments but knowing that in time in a high-interest environment that will come at a price for customers.
While it’s great to see proposals around responsible banking and stakeholder capitalism, it means little if firms aren’t quantifying that commitment- Banker
It is something Citi’s chief executive, Mike Corbat, has also pointed out – that banks are walking “a fine line” between helping customers and giving them loans they won’t be able to pay back.
For shareholders, Dettling says, there is always “a balancing act”.
“Banks have to make profits, and so they have to answer to shareholders,” she says. “But what we are seeing is that shareholders are experiencing first-hand what it means to balance their own needs versus those of society.
“Will that remain post-Covid? I’m not confident it will, but a hope would be that shareholder interests increasingly include broader societal interests.”
Marcos Eguiguren, head of the Global Alliance for Banking on Values, says shareholders’ expectations around banking profits have already been tempered to some extent.
“From the mid 1990s leading up to the great financial crisis banks had huge ROEs [returns on equity], and from a shareholder perspective became increasingly attractive,” he says. “Those expectations have shifted, however. CEOs and shareholders have become more prudent about profitability and forecasts these last five to six years.”
That said, he adds that the message of banks being at the service of society has been less understood. That message has changed as a result of the pandemic and “we need to keep that going,” he adds.
The World Economic Forum’s Matthew Blake, head of financial and monetary systems, says expectations must be tempered.
“The financial industry had something of a scarlet letter on it after the great financial crisis; and financial institutions have dug themselves out of that and are trying to position themselves so they won’t be viewed in the same light. But that will require some hard choices.”
Matthew Blake, head of financial and monetary systems, World Economic Forum
While firms have been putting their balance sheets to work and getting money to people and liquidity to companies, they are being viewed in a positive way and rightly so, Blake says. But what happens if this crisis continues?
“Just because we’re not in a financial crisis now doesn’t mean that one will not develop down the line,” he adds. “There is only so much banks with good capital and liquidity can do to stem the tide, and there’s not an investor in banks out there that isn’t focused on the rise in non-performing loans and the money set aside for them.
“There is an attempt to serve clients and society, but at the end of the day there will be trade-offs made that affect stakeholders somewhere.”
And let’s not forget, he adds, “financial stability hinges on the long-term profitability of banks.”
Dettling says that, given the uncertain period ahead, banks’ present efforts mustn’t be overlooked.
“The economic downturn will likely lead to large-scale job losses within the financial industry. Revenue and profitability are down, and bankers expect colleagues to be let go of. Against that background it’s been encouraging to see the spirit of ‘let’s do what we need to do and what we can do, and we will deal with our problems when they come’.”
Will this be a defining era for responsible banking? The pandemic and its impact have demonstrated how important it is that banks adopt the many measures they have over the last decade, keeping sustainability and responsibility at the top of board agendas.
These commitments have made a difference. Those that are signatories to the PRB, for example, say the process of signing up has helped them deal with the Covid-19 crisis better.
“UBS in Society was set up in 2014,” says Costanza. “We had done a lot of work with shareholders and coordinating the sustainability efforts across the bank, but preparing to sign up to the PRB is changing the way we think about how we work and how we measure the impact we are having across the board. It forces us to be even more thoughtful about what’s effective.”
At Santander, Matarranz mentions that being a signatory has helped the bank better understand how its stakeholders are all interconnected and how they are all being impacted.
“Whether it’s a mortgage extension or a measure for employees, the work we have done through the PRB on top of our own commitments has been incredibly powerful in helping us make the right decisions quickly.”
Dettling says she understands that sentiment and is receiving similar feedback.
“The principles give you very good structure for approaching this strategically, for really understanding what are the needs of each of your stakeholders, so you can know what the potential impact for them during this crisis would be and therefore how best to respond,” she says.
“By now our signatories would have had time to do their impact analysis, understanding the financing for retail and SME customers, so they should have a better and quicker understanding of what they need to do to mitigate any negative impact.”
At the PRB’s second virtual meeting in late April, one Malaysian bank said that in the months since becoming a PRB signatory they had engaged much more with retail and SME clients on environmental and especially social challenges. That meant that when the crisis hit, the bank had a much better understanding of what challenges SMEs and retail customers would encounter and was able to tailor its services to support them better and faster.
Impact analysis could become mandatory as we head into a future of more potential crises from climate change. It would also put an end to the window dressing that Costanza is concerned about.
As one banker points out: “If an entrepreneur came to you with a proposal but didn’t provide the financials, you would not take them seriously. Similarly, while it’s great to see proposals around responsible banking and stakeholder capitalism, it means little if firms aren’t quantifying that commitment.”
Collaboration may also become more commonplace. Dettling says there has been more teamwork among members during this crisis than at any other time.
“There is a sense we are in this together and that they want to understand what banks in other countries are doing,” she says. “There is a sense of shared destiny and an understanding that they can progress faster if collaborating.”
It’s a shared destiny entangled in a shared history.
Speaking of the industry, Finucane says: “We were chastened by the financial crisis of 2008 and have had to learn humility but also have had to rise to the challenge of being more innovative in everything from lending more to low-to-moderate-income communities through to financing renewable energy. Everything we have learned over the last 12 years has been applied during this crisis, and hopefully we are demonstrating we are worthy of the role we are now playing.”
The role of a bank chief is changing too – perhaps for ever.
“What is needed is a clearness of purpose from leadership going beyond the P&L narrative quarter to quarter,” says Blake. “If you are a leader of a financial institution – or any company for that matter – one’s narrative must extend beyond the numerical to maintain credibility.”
Santander’s Botín says: “When you’re asked what are your priorities, I say: our people’s safety; then it is the health crisis in general; and linked to these what I call business continuity, us and our customer.
“How do we get back to the new normal? How do we run the business? Every sector has to do its analysis of how you protect your team and continue doing business. That’s really what I’m thinking about all day.”