Eight years after the financial meltdown, banking is still facing an existential crisis. Pen Pendleton looks at why the industry is still struggling with a definitional identity.
What should banking be? The question arises again and again. Most recently in a full series of commentary and reporting by The Wall Street Journal.
As a communications and branding professional who spent the better part of 20 years fostering and protecting the reputation of investment firms and banks, I naturally have my own views on this dialogue. It’s not entirely new. While I worked in banking, identities and business definitions changed with nearly every market cycle and new management team.
Each new branding exercise reconfirmed that few industries rely on public trust to a greater extent than banking. That trust has evolved over time as the business became increasingly dynamic and competitive. In the decades leading up to the financial crisis, banks relied on trust as the lingua franca of their business. Communications played a more important role, especially as banks built “universal” franchises serving an increasingly diverse set of global customers across a dizzying array of products and services.
Trust and reputation were useful for marketing purposes, but when banks took these balance sheet intangibles and employed them for funding purposes, the seeds were sown for their ultimate destruction. Desperate for growth and liquidity, trust became an implicit credit component. It represented the core value of credit quality behind otherwise “hard-to-value” securities that firms lent in the overnight cash markets. The cycle of leveraging trust and reputation continued until counterparties would no longer take Lehman Brothers’ credit. With that blow, an entire business model came tumbling down.
If reputation and identity – the existential assets that we communications professionals were responsible for preserving — had been immaterial, we all would have moved on from the financial crisis. But in the absence of trust, the public has insisted on putative regulatory oversight, including capital adequacy ratios that have fundamentally changed the economics of banking.
Banks need to redefine themselves and build trust around new business models. That’s already happening. Private equity and other non-banking capital providers are slowly building branded trust, as have smaller consumer savings and investment businesses. But for the remaining global deposit-taking banking firms, how will they be defined? In their current trauma, bankers don’t seem to have a clear idea.
Pen Pendleton is a co-founder of CLP & Partners, a strategic communications firm based in New York and London.