Separation of sales and risk is wrong

A venerable Bank of Scotland General Manager, now long retired, once told me that  Scottish bank managers looked deep into your soul and only when they were convinced you did not need the money would they agree to lend to you.


Justin Welby at the parliamentary hearings
Justin Welby

A similar sentiment came in remarks at the Parliamentary Commission hearings from Justin Welby, the next Archbishop of Canterbury. Recalling his time as an oil trader in the 1980s he likened trying to borrow from Peter Burt and Gordon McQueen at the Bank to “screwing blood out of a stone to get them to part with their precious money.”

How did we go from that to the situation described at the trial of serial fraudster Achilleas Kallakis, who was jailed for seven years? This former estate agent and his counterfeiter accomplice, pretended to be high rolling developers backed by a major Hong Kong property company. The fraud was simple: they rented offices in Mayfair, produced reams of fake documents and hired an actor to impersonate a Hong Kong executive.

Like all good illusionists they could rely on their audience to be easily distracted and to believe what they wanted to believe.

They didn’t have to be terribly sophisticated. Like all good illusionists they could rely on their audience to be easily distracted and to believe what they wanted to believe.

Bank of Scotland lent Kallakis €26 million to convert a 100 metre passenger ferry into a luxury yacht. They disregarded warnings from their own legal advisers and relied on letters of assurance from a Swiss lawyer, believed by the prosecution to be part of the conspiracy.

The Bank wasn’t alone. Allied Irish lent the fraudsters £750 million and other banks duped included Bristol & West (now part of Bank of Ireland), Barclays and GE Capital, which financed a private helicopter and a corporate jet.

Why were all these bankers so easily fooled? I believe it all becomes explicable when you understand the changes in management organisation in banks over the past 20 years. Under the old system, when managers stayed in post for years at a time, the originator of the loan remained responsible for it. When he (it was usually ‘he’) made the decision he had to weigh the profit the bank would make against the risk it was running. If the loan went bad it could blight his career.

By the time of the credit boom the two functions had been separated. The dealmakers worked to sales targets – and their bonuses and their future prospects depended on reaching or exceeding them. Risk assessment was outsourced to risk departments and risk committees, who were regarded within banks as a lower form of pond life.

As the FSA report into Bank of Scotland corporate found, the dealmakers had no problem in brow-beating the risk department and a “culture of optimism” reigned. But optimism is no substitute for hard headed risk assessment.




One response to “Separation of sales and risk is wrong”

  1. zinkus Avatar

    Mebbes. Bank branches were originally geared to raising deposits to be lent elsewhere (for a Scottish bank this meant primarily via the Glasgow, Edinburgh and London head offices) with branch managers rewarded accordingly.

    Yes, they did some lending, but that wasn’t the point plus there was thought to be the risk of them “going native” i.e. lending too much to their friends and associates who were also members of the various local committees and societies bank managers were expected to join. Hence, after a manager retired a “young thruster” was often appointed to clean the branch up, alienating people in the process, before being moved on to a more permanent position elsewhere.

    The formal separation of “dealmakers” from credit was largely a product of the 1989-93 debacle; after it the discretionary lending authority of bank managers was either curtailed or removed and credit sanctioners placed in splendid isolation, at a remove from Murrayfield and the golf course in exchange for bonuses determined by their personal attributes and behaviour as well as the quality of their decision-making. By contrast relationship managers were rewarded according to how much “product” they could punt. At RBS this would be Project Columbas.

    Turning to your explanation as to why things turned out the way they did, the notion of orginators staying in place and remaining responsible for their past decisions was certainly a factor. Indeed, for a time Edinburgh saw a cadre of relationship managers moving between banks on a reasonably regular basis taking their connections with them (the appearance of the Irish banks and former building societies helped here). And yes, some of these were known to do the rounds punting this year’s target busting/next year’s impairments “dreck”. However, they reflected a broader change not so much from service to sales as from an invasively paternalistic approach to employment (why does no one outside banking remember the marriage bar on male bank employees I wonder?) to a more “market” driven one.

    As for bad deals blighting a career, that runs into your point about how risk (credit) colleagues and committees were not so much viewed by relationship managers as able to be treated by them i.e. the culture of specific organisations and the organisational arrangements reached therein, particularly what values and behaviour were actively encouraged and rewarded, via ever more elaborate HR schemes, and those that weren’t.

    Or to put it another way how did someone who explicitly challenged the “culture of optimism” fare compared to those who – retrospectively as I understand it – simply did as they were told, preferably with a smile if they wanted to get on? Comparing the personal fortunes of say a Paul Moore with a Leith Robertson makes clear the latter was (and remains) the easier and far more rewarding option.

    Following on from this, the complicity of all those who were in charge of the Scottish banks in 2007 is clear. They never just did, with the benefit of hindsight, a few bad deals (rather tthey did loads to a monumentally destructive extent that were obviously crud at the time). Nor where they just the victims of unprecedented circumstance (that brought down their banks, but not rival ones). Rather, they – supported by battalions of back office functionaries and high falutin’ consultants – actively structured, shaped and policed bureaucratic machines wholly geared to aggressively imposing this “culture of optimism” and all that entailed then and now.