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Entrepreneurs’ best friend growing long in the tooth

by Kevin Rafferty

HONG KONG — Standard Chartered Bank has an advertisement currently running on television that is eye-catching and thought-provoking. Its central message is that “not everything that counts in life can be counted” and that the bank wants to be “here for people; here for progress; here for the long run; here for good” (double-entendre intended).

The ad presents the classic picture of the bank as financial intermediary and entrepreneurs’ and business executives’ best friend, supporting them with lending and management advice to make new projects prosper and older businesses continue to run smoothly and profitably.

It is an image of bankers that has got lost in a modern age where big banks have become industrial-sized financial machines. However smart and charming they may be, it is hard to see the sharp-suited and well-heeled executives of Goldman Sachs or Morgan Stanley wandering through Africa or Inner Mongolia, or even outer Osaka, looking for budding entrepreneurs to support. Indeed, it is hard to see executives of the big Chinese banks spending much time tramping through green field sites.

If they are not fine-tuning their computers to beat competitors in program-trading, they will more likely be thinking of fat fees they can earn with mega-deals for mergers and acquisitions, no doubt with an eye on fatter fees when it comes to unbundling and selling off the assets of those deals.

But the Standard Chartered presentation was very much the model of the modern banker a couple of generations ago. The then Hongkong and Shanghai Banking Corporation built its reputation and its profits and its dominance in Hong Kong in the difficult postwar years by going to meet men with dreams in the shabby shells they hoped to turn into factories, and lending to them sometimes on the collateral of their word and those dreams.

Bankers took great pride in spotting and financing entrepreneurs with ideas who would create jobs, good products and wealth. Hong Kong was not unique. Japan’s great growth was built on funds to industry from Industrial Bank of Japan and other big banks, and the tight links between companies and their bankers were fostered by cross-shareholdings, with the bank usually acting as the head of the keiretsu. In Europe too, especially Germany, there were close links and ownership between leading companies and banks.

In the small towns of many countries, if you wanted a passport form or other legal documents countersigned or witnessed, a solicitor, a clergyman or a bank manager was the stalwart whose signature would be accepted without question.

These days, HSBC’s advertisements stressing that it is “the world’s local bank” and able to interpret and advise on local customs, such as whether it is best to bow or shake hands, stand or sit to do business, try to tell the same story — the banker and bank at the heart of the local community. But it is not the whole story.

Many big companies rely on their own reputation to go into the financial markets for funds, especially for big projects. Even in these days when the West is still teetering on the edge of recession, the biggest companies are cash-rich.

The idea of bankers as a responsible and central part of a community and of a country’s economy has also taken a knock as banks have become more international and diversified in their activities. The biggest financial institutions have become global monsters that seem to have no allegiance to any place.

Appointment of investment bankers to head the biggest U.K. banks, along with threats by banks to move their headquarters from London if the government imposes new taxes on the highest-paid bankers suggest that banks owe no allegiance to any government, except perhaps at bailout time.

The battles that have gone on over new international regulations known as Basel III — after the city in Switzerland that is headquarters of the Bank for International Settlements — can hardly inspire confidence in big banks’ keenness for stronger rules that may prevent new global crises. The Basel III accords will increase the core capital that banks must hold from 2 percent to 7 percent of risk-weighted assets. The regulators, under pressure from banks, lowered the expected ratio and postponed its full enforcement from 2012 to 2020.

Ten years is several worlds away in finance. The last 10 years saw the Nasdaq bubble of 2000, a bear market in equities, a bubble in credit and the implosion of Bear Sterns and the ensuing financial and economic mess, costing millions of jobs.

Banks protested against Basel III that the extra dollars kept locked in capital would mean fewer dollars for lending, even though one of the problems with slow-growing Western economies is that banks are reluctant to lend and big corporations are sitting on mountains of cash. Bank shares rose on news of the postponement of the stricter rules to 2020.

There are still big questions concerning Basel III, ably summarized by Yves Smith in the Naked Capitalism blog. They include valuation since “the capital ratios mean nothing if the assets are overvalued”; where “there is still no harmonization of accounting practices on all of the shadow banking apparatus, special-purpose vehicles, derivative netting and repos”; when regulatory risk ratings “are still a mess”; and when “it’s been such a long time since I’ve seen any [enforcement] that I have forgotten what it is.”

Dennis Butler, president of Centre Street Cambridge Corporation, has just published an analysis that claims that the core issue is making individual bankers take responsibility for their actions. He says banks, like airlines, have never made money. It may seem outrageous, but if you add up the losses from the 1930s, the savings and loan crisis plus the current debacle, it is probably true.

Butler goes on to ask, “How many bankers suffer the same fate when it comes to their own personal financial affairs?” He claims that there is a “fundamental flaw in the corporate form of business organization — the lack of personal liability on the part of the people in charge. This has permitted individuals responsible for huge losses and public burdens to walk away virtually unscathed and with fortunes unimaginable to the average taxpayer.”

He wonders whether Basel III and tighter regulations will have much impact: “The new reforms may have an effect for a while, until diluted by lobbying and corruption of the oversight process. As long as incentives for personal gain and corporate risk-taking remain in place, episodes of over-reaching will recur.”

Kevin Rafferty is author of “Inside Japan’s Powerhouses,” a study of Japan Inc. and internationalization.