Understand Swedish Banking History and Key Issues
Explore the history of Svenska Handelsbanken, the Swedish banking crisis of 1985-92, and key issues in banking such as asset/liability mismatch and the role of investment banking. Discover insights into financial crises and banking business intricacies.
Download Presentation
Please find below an Image/Link to download the presentation.
The content on the website is provided AS IS for your information and personal use only. It may not be sold, licensed, or shared on other websites without obtaining consent from the author. If you encounter any issues during the download, it is possible that the publisher has removed the file from their server.
You are allowed to download the files provided on this website for personal or commercial use, subject to the condition that they are used lawfully. All files are the property of their respective owners.
The content on the website is provided AS IS for your information and personal use only. It may not be sold, licensed, or shared on other websites without obtaining consent from the author.
E N D
Presentation Transcript
Better Banking : Svenska Handelsbanken Anant Jain
Financial Crisis What went wrong General Explanations Macroeconomic factors Policy issues Psychology and behavioral issues Specific Explanations Excessive and asymmetric bonus systems Short-term orientation towards shareholder value Repeal of the Glass-Steagall Act Separation of commercial and investment banking Lax, light-touch regulation Misguided accounting standards and capital guidelines
Banking business Commercial banking Bank mostly has to be a commission agent/a broker for money Boring business Heavily regulated Social Necessity Investment banking No social utility Risk taking Almost like any other business What happens when commercial banks lend to investment banks?
Banking: Key Issues Asset/Liability mismatch Maturity, Variable/Fixed mismatch, Currency Supporting Clients balance sheet mismatches Lending to over indebted customers Investing in non core assets In times of stress only treasuries are liquid. Dealing with non bank finance systems Lends money where banks do not lend Magnifies the problem Who control the underwriting? Real Estate and other asset backed lending Banking activity changes fundamentals Self-reinforcing Speculative vs Core activity Difficult to differentiate Peer pressure Off balance sheet vehicles Who is the guarantor? The continuity of past to the future Housing/Asset price sensitivity Reversion to mean
Handelsbanken: History Founded in 1871 as Stockholms Handelsbank Bank grew significantly by M&A Could not escape the depression Went the American way Centralization of decision banking Big changes happened in 1970 when John Wallander became CEO
Swedish Banking Crisis (1985-92) Sweden deregulated its banking system in mid 80s Private sector loan grew from 85% to 135% of GDP in 5 years Real estate prices went up by 125% 50% of loans were foreign currency mainly Dutch Mark ERM (European Rate Mechanism) pegged Swedish Crown at par with German Mark Interest rates increased significantly when Germans raised rates Next 3 years GDP contracted by 6% and Industrial Output by 17% All large banks except Handelsbanken were nationalized
Handelsbanken (1985-92) -3% ROE vs -55% for rest of the Banking Industry Lesser Exposure to troubled sectors Real Estate, Financials, Leveraged Acquisition Better borrowers across all sectors. Among the above two Portfolio weights explain only 14% of loan loss, 86% are due to better customer selection Transferred repossessed real estate to a subsidiary and gave its shares to existing shareholders Lessons learned Control underwriting. No loans to finance companies Less trust on collateral value. More on cash flow Overall profits were 50% higher in 1996 than pre crisis level of 1990
Handelsbanken: Strategy The branch is the Bank Branches does/decide on Pricing for each customer. No bank wide pricing. Marketing, no centralized marketing. Hiring, number of people and their salary Customer segmentation Local hiring IT, Admin/Back office work Website for every branch Local branch officer has to approve every loan Large loans go to regional branch Very large loans go to central branch About .2% loan decisions are made centrally. About .01% requires CEO approval. No growth targets. Achieve median RoE and compete on that. No call center on working days. Call your branch Central HQ is the last one to know answers of all these questions No cross selling of Insurance/Mutual Fund personal loans. No big bang plans, marketing etc. Just boring banking.
Autonomy Risks and Control Key function of regional branch (30-60 branches) Monitor individual branches Train individual branches Find branch managers who resonate with the bank s philosophy New branches have low discretionary lending limit New branches deals only with existing customer s in that area Maturity risk: All short term deposits go to central treasury. The charges for long term loans are decided by central treasury. Maturity risk: All deposits go to central treasury. The charges for long term loans are decided by central treasury by matching. Branches gets different rates that corresponds to their mismatch. Annual branch audit and rating by internal team. Branches pay to HQ for each unit of capital consumed.
Culture and Incentive Individual branches compete on how much money not spent and good loan quality Internal ranking and benchmarking in terms of loan quality are publicly disclosed No bonus If the bank achieves its targets in terms of RoE wrt peers additional allocation is made to a pension foundation which majorly invests in banks shares Incentive for Employee Job Satisfaction Implicit Job guarantee Careers are made within bank with very less senior position from external hiring. Good performance Low costs Low credit losses Doing better than peers
Risk Management Loans Nearly 60% approved by branch Loans reviews by regional branch to ensure bank s credit policy is followed and good judegement is applied More focus on creditworthiness of client than quantitative aspects No portfolio control at the central level Focus on default risk only, no higher risks for higher margins No homogenous portfolio of loans, each borrower is different No Lending to NBFCs No exposure to emerging markets Highest Capital Adequacy ratio First bank to have capital target under Basel II No Planning and forecasting for revenue Treasury Operations Treasury a function without profit objective No guessing and betting on interest rates/currency fluctuations Manage asset mismatch by only long term liabilities of home savings
Investor Communications No guidance Resisting Investor pressure Growth Market Share Management Avoidance of management cult acting like a steward Incremental vs radical Long time horizons Make it more Handelsbanken No regular magazine interviews Totally unexciting
Handelsbanken: Stakeholders Customers Very high ratings Leader among large banks Staff Very high satisfaction Good pay Responsibility Shareholders Can be torturous during credit growth Long term value creation Higher RoE than peer group for 36 years in a row
Sources https://www.youtube.com/watch?v=myA5sVZ fUv8 https://www.youtube.com/watch?v=HYuOvoC Xpfk https://www.youtube.com/watch?v=aJ_- hjZdNIw https://www.youtube.com/watch?v=bmYa- dVwM9g A blueprint for better banking by Niels Kroner
