Top banking executives defect as image problems and regulations bite


Why would anyone in their right mind want to run a big UK bank? This question, posed by a British executive working at a high level in a Wall Street bank in London, underscores the challenges facing the sector more than five years after the financial crisis.

The executive had spent the previous hour rattling off many of the reasons why a job at the top of a big bank was no longer such an attractive prize for an ambitious financier. These include regulation, squeezed profits, lower pay and a besmirched image.

As if to underscore the point, a few days earlier in New York, Mike Cavanagh quit as co­head of investment banking at JPMorgan Chase, one of the world’s biggest banks, to join the Carlyle Group, the private equity investor.

Mr Cavanagh cited a more favourable lifestyle among his reasons for leaving JPMorgan, where he was one of the favourites to succeed Jamie Dimon as chief executive. Pay almost certainly played a part too – Carlyle will pay him $39m this year as its co­president, more than double what he earned at the bank.


JPMorgan emerged from the financial crisis in a stronger position than most big rivals. But Mr Cavanagh is the latest of several high­flying executives – including Bill Winters and Jes Staley – who have left the bank for a life in the more lightly­regulated, less scrutinised and better paid world of hedge funds and private equity.

Only this month, Blythe Masters, one of the most prominent women on Wall Street, quit as head of JPMorgan’s commodities business, which has come under scrutiny from regulators and is being sold to Mercuria, a Geneva­based trading house.

In the UK, there have also been some high­profile departures from the big banks. Richard Meddings shocked the City of London by stepping down as the well­regarded finance director of Standard Chartered in January.

Late last year, Sir Hector Sants, the former head of the UK’s financial regulator, quit Barclays complaining of “exhaustion and stress” less than a year after being hired amid much fanfare to be its head of regulatory affairs.

It is more than five years since Lehman Brothers collapsed, bringing the financial system to its knees and forcing big banks in the US and Europe to turn to their governments for bailouts. But the sector is still struggling to rebuild its image.

“I’m not sure bankers need to wear sackcloth, but nor should they jump back into wearing Gucci suits,” said Mark Carney, governor of the Bank of England, during a visit to the northeast of England this month. “I think there needs to be an improvement in terms of banker conduct.”

A report by the consultants Edelman released at this year’s World Economic Forum in Davos indicated that only 51 per cent of people trust banks in leading markets, sharply fewer than in other business sectors.

It has hardly helped the banking sector’s image that since the financial crisis, it has been hit by scandal after scandal. In the US, the big banks have paid out $100bn in legal settlements since the crisis, according to Financial Times research, with more than half of the penalties extracted in the past year.

Many of these fines concerned banks’ practices in the foreclosure business, lending practices, market manipulation and fraudulently issuing mortgage­backed securities. JPMorgan alone has set aside $23bn to tackle legal issues and in November it agreed to pay a record $13bn to the Department of Justice and state authorities for mis­selling mortgage-backed securities.

The global investigation into alleged manipulation of the Libor interest rate benchmark has also led to billions of dollars worth of fines for banks including Barclays, Royal Bank of Scotland and UBS.

Regulators and bankers have said they expect a mushrooming probe into alleged collusion between bankers in the foreign exchange market will ultimately prove even more costly for the industry.

About 80 per cent of last year’s profits at the five largest UK banks were eaten up by legal settlements and provisions, according to a KPMG report published this month.

Much of this was accounted for by the almost £20bn of provisions made by banks for the cost of compensating customers for mis­sold payment protection policies.

“It is important that people are adequately reimbursed for mis­selling, but large remediation bills hinder investment in the business,” says Richard McCarthy, UK head of banking at KPMG. “Ultimately, it will be customers who lose out if banks can’t invest in their future.”

There are some signs that the pummelling the banking industry has received from regulators, politicians and the media is having an impact on its attractiveness among students looking for a career – though not to the extent some observers might expect.

A recent survey by Deloitte of 108,000 business students at 1,350 universities across the world found that the popularity of working in banking had fallen five places to 35 out of 100 potential employers.

“Banking has declined in popularity and is now level pegging with software and technology,”says Nicholas Sandall, UK managing partner for financial services at Deloitte.

“There doesn’t seem to have been a massive turn­off over ethics, or not as much as you might have thought.”

One of the big draws of a career in banking has also diminished – the pay.

While investment bankers are still paid much more than other professions, such as doctors or engineers, the gap has been narrowing since the financial crisis – the first time it has done so for a generation.

Average pay per head in a sample of nine European and US investment banks fell from 9.5 times the private sector average in 2006 to 5.8 times in 2012, according to research compiled by PwC exclusively for the FT.

Yet big investment banks continue to attract vast numbers of applicants for their analyst graduate trainee schemes.

Goldman Sachs had 17,000 applicants for its 350 investment banking internships last year. And this year, for Goldman’s analyst class – its main route for recruiting undergraduates –the US investment bank had 43,000 candidates for 1,900 positions.

One area where most banks are looking to invest and recruit new blood is technology. Faced with growing demand for customers to do their banking and payments via smartphones, lenders are responding by producing an increasing number of digital banking apps and payment systems. For this they need technology expertise.

For instance, Barclays this year hired Usama Fayyad, a technology industry veteran who formerly worked for Yahoo as its chief data officer. That followed the arrival at Barclays of Shadman Zafar from US telecom operator Verizon to be its chief digital officer.

Yet Julian Skan, managing director at Accenture for the banking industry in Europe, Africa and Latin America, says that regulation is adding fresh layers of complexity to the technology requirements of banks.

“Bank IT executives are very talented and well paid, but they have to sweat spinal fluid over regulation sometimes,” he says.

Amid all the uncertainty in the banking industry, one thing seems certain.

Given the scale and complexity of the regulation that is set to confront the sector for many years to come, anybody with experience or training in financial compliance is set to be in hot demand.

Author: Martin Arnold


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