After three rounds of mergers of 28 public sector banks (PSBs) to reduce their number to 12, the Union government is now planning to sell some of them. The familiar cliché is that it is not the business of the government to be in business. With the non-performing assets (NPAs) going out of control, the PSBs are in a pretty bad shape. The government has no money to strengthen their capital. Instead, if they are sold, the sale proceeds could help augment the resources of a revenue-starved government. The measure will help, it is argued, to make the banks turn around and give a push to economic activity.
This is based on a premise that private ownership promotes higher efficiency. Is this premise borne out by facts?
A look at the conduct of a few financial titans during the recent years gives us a different story. Advanced and emerging economies suffered heavily because of the questionable conduct of their large banks. Given below are a few instructive cases. (The facts quoted here are culled out from the reports and studies available in the public domain.)
How Wells Fargo ‘conned the little guy’ in America
Founded in 1852, the USA based Wells Fargo Bank (WFB) steered clear of the 2007-08 global financial crisis (GFC), acquired the struggling Wachovia Bank and , by the next decade, emerged, in terms of assets, as the third largest bank in the country. Several journals and consulting firms showered encomiums on the Bank’s leadership, its work culture and for being among ‘great places to work’.
Yet, a decade after the GFC, the can of its worms stood exposed. In 2019, a US Congressional committee held it accountable for customer abuses from 2002 to 2016. In January 2020, WFB entered into a settlement with the US department of justice (DOJ) to pay $3billion as fine and agreed to be monitored for the next three years after which the prosecution could be dropped. This was in addition to the fines and penalties totalling about half a billion dollars already paid by WFB till then.
What were its misdemeanours? Between 2002 and 2016, WFB opened millions of customers’ accounts without their knowledge. It overcharged its borrowers, illegally took possession of cars and homes, failed to report suspected money laundering transactions and granted mortgage loans against fabricated property records. Its employees were pressurised to sell insurance policies of Prudential Insurance with which WFB had a tie-up. In the process, several malpractices, like purchasing policies without customers’ knowledge and authority, issuing and later cancelling policies and allowing them to lapse and issuing fresh policies, took place. It was reported that 70% of the policies lapsed in the first year of their being issued! All these were done to reach sales targets which in turn would fetch them incentives and bonus to the top executives.
During the Congressional hearing, US Senator Elizabeth Warren in her searing address to the then CEO, John Stumpf summed up the stinking saga of the Bank:
“You know, here’s what really gets me about this, Mr. Stumpf. If one of your tellers took a handful of $20 bills out of the cash drawer, they’d probably be looking at criminal charges for theft. They could end up in prison. But you squeezed your employees to the breaking point so they would cheat customers and you could drive up the value of your stock and put hundreds of millions of dollars in your own pocket. And when it all blew up, you kept your job, you kept your multimillion dollar bonuses, and you went on television to blame thousands of $12-an-hour employees who were just trying to meet cross-sell quotas that made you rich. This is about accountability… You should give back the money that you took while this scam was going on, and you should be criminally investigated by both the department of justice and the Securities and Exchange Commission.”
Warren Buffett’s Berkshire Hathaway was WFB’s largest shareholder with 7.82% shares. Mr Buffet had to face embarrassing questions from an intrepid shareholder in Berkshire Hathaway’s shareholders’ meeting held in May 2019.
Between 2016 and 2020, Mr Stumpf and his successor, Timothy Sloan relinquished their jobs and returned substantial part of the bonus they had received for their services. The Bank fired over 5000 employees for their acts, although they were under pressure to reach the sales targets.
“Wells has come to symbolise all that is wrong with corporate America. It conned the little guy,” wrote The Economist in June 2019.
Australian Banks Undermine Financial Integrity
Australia’s four big banks, namely, Commonwealth Bank, ANZ, National Australia Bank and Westpac control as much as 80% of the country’s financial business. In February 2019, the high-powered Australian Royal Commission on Banking (ARC), after a year-long enquiry brought out a damning report about these banks. Their conduct seriously undermined Australia’s financial system.
Why were they indicted? The ARC zeroed in on the following issues:
They collected hidden fees, charged customers for non-existent services, debited charges to the accounts of the dead, gave advice to customers to invest in underperforming mutual funds, sold junk products to the poor and the mentally challenged, breached the country’s anti-money-laundering law and created mortgages on non-existent properties. Westpac, the second largest bank, had violated anti-money-laundering and counter-terrorism financing laws 23 million times during the period. Millions of customers were exploited and some financially ruined by the banks.
The ARC concluded that the banks were driven by greed. Its observations are eye openers:
“Having lost the trust of the Australian people, we must now do whatever it takes to earn that trust back. To move from a selling culture to a service culture, there is much more work to be done in every bank. But every bank is determined to find the problems, to fix them and to pay back every penny.”
Royal Bank of Scotland Goes Under
United Kingdom’s Royal Bank of Scotland (RBS) had a history of 300 years. In 2008, it suffered an astounding loss of £24 billion and the government bailed it out by pumping in £45 billion -that was the largest corporate rescue ever. It was a bottomless hole. In July 2020, RBS merged itself with NatWest group (earlier known as National Westminster Bank); about 18,000 employees lost their jobs.
Before the GFC, RBS took over National Westminster Bank, then notorious for its inefficiency. This move enabled it to become the biggest globally, although for a short while. The CEO, Sir Fred Goodwin, earned a reputation as a turnaround architect. But therein were sown the seeds of its virtual collapse.
It overexposed itself to sub-prime mortgages to reach targets; treated its small customers unethically; acquired ABN Amro Bank without due diligence; the leadership was arrogant and the board failed in its fiduciary responsibility. Returns on equity became the driving force rather than building asset quality. The internal supervisory and control systems failed to do their job. Sir Fred was stripped of his knighthood.
The chairman of UK’s financial services authority, which investigated the irregularities, said in his report released in December 2011:
“RBS’s failure in October 2008 has imposed large costs on UK citizens. To prevent collapse the government injected £45.5bn of equity capital: that stake is now worth about £20bn. But this loss is only a small part of the cost resulting from the financial crisis. The larger costs arise from the recession which resulted from that crisis, within which RBS’s failure played a significant role.”
Despite the government’s bailout, RBS could not turn around and, ultimately, NatWest Group, the holding company of the bank which was acquired by it, took over the sick giant in 2020 July.
Deustche Bank, another ‘Lehman Brothers in the Making’?
The 150-year-old Deustche Bank (DB) is the largest bank of Germany and is among the top-10 banks globally. It has assets worth a trillion dollars, operates worldwide and had about 100,000 employees (in 2016).
With all that strength, between 2009 and 2018, DB lost $14.8 billion in market value. A proposed merger of Commerzbank of Frankfurt was called off. In 2019, it worked out a plan of restructure to resolve its financial woes. It announced closure of its equities and trading operations, cut back on investment banking and shed about 15% of its staff worldwide (including India).
In 2016, several financial publications and analysts warned that DB could be a new Lehman Brothers in the making and cause serious instability in the global financial market. What led to this crisis?
It was accused of money laundering, triggering tax raids at its German headquarters in 2018 and had to cough up huge penalties for the offence. In 2015, it was involved in LIBOR scandals and was heavily fined by the US and the British authorities. In 2017, it entered into a $7.2 billion settlement with US DoJ for its involvement in contaminated mortgages. It had already spent more than $13 billion on litigation.
Ukraine’s ‘PrivatBank’ Nationalised
Ukraine was part of the erstwhile USSR. After the breakup of the Soviet Union in 1991, Ukraine became independent. As part of its transition from a controlled economy, many measures were taken by the Ukrainian government. In the financial sector, private sector was allowed entry. The first bank to be founded was PrivatBank in 1992. Over years it grew in size, in its reach and in terms of the variety of services provided. By the second decade of this century it became the biggest private sector bank in Ukraine. It was part owned by Ihor Kolomoisky, a billionaire oligarch with huge stakes in different sectors.
In December 2016, PrivatBank was nationalized. The reasons: the bank’s imprudent lending policies led to loss of its capital. About 97% of its loans had gone to companies owned by the main promoters. Its failure would have caused severe economic crisis. With 20 million customers which included 3.2 million pensioners and 1.6 million socially vulnerable households, any failure of the Bank would have been disastrous.
International Monetary Fund, which backed the Ukraine’s decision, commended the measure as an ‘important step towards safeguarding the country’s financial stability’.
(Tomorrow we will see what is the scenario in India)
(TR Bhat is former president of All India Bank Officers' Confederation (AIBOC). I was not President, I was a Joint General Secretary (1995-2009)