Here’s a good interview with TD Bank’s CEO on the risks of modern banking and why the American model is flawed (via Bloomberg TV):
Bloomberg TV’s Erik Schatzker sat down with Toronto Dominion CEO Edmund Clark, who calls himself an old-fashioned banker, to talk about the strategy of Canada’s second-biggest bank and why the countries’ banks have fared better than U.S. counterparts. Clark’s “old-fashioned” approach of lending money to businesses and consumers has helped TD post a three-year return that is 11x higher than JPMorgan’s, with almost half the volatility .
Clark said that, “If you want to speculate, don’t call yourself a bank, call yourself a hedge fund” and “a huge portion of Wall Street’s earnings were built around the model of ‘I’m going to bet against my clients.'”
Clark on whether Jamie Dimon is looking at the capital surcharge the wrong way:
“Well, Jamie, I know, is a phenomenal banker. So I would acknowledge that if we had to choose…most people would choose him and not me. But, I think fundamentally what he’s saying is ‘the way we did business before, we’re not going to be able to do under the capital and liquidity rules that we have.’ And that’s exactly what the regulator’s trying to get you to do, is change your business model. And no one likes to change their business model. I believe in capitalism and I believe in an economy, what happens when you increase the cost of a good. So do I think 10 years from now JPMorgan will be out of business because of Basel III? No. They’ll figure out another way to make money, but in a way that may be more investing in the economy and less speculating against competitors.”
On whether the world’s largest banks should pay a capital surcharge:
“I’m in favor of capital surcharge. I know, and I’ve said before, it makes me a little unpopular with my colleagues. But I do think we have to recognize that as we get bigger and bigger and more complex, and most people would say it’s the complexity that’s the issue less than pure size, the consequences of getting it wrong for society are larger and therefore the cushion or insurance, which is what capital is, should be larger.”
“I’m a big advocate of Basel III. I think the industry should be saying we want everyone to have lots of capital, adequate capital, and we want them to have lots of liquidity. And so instead of attacking Basel III they should be supporting it.”
On Wall Street banking:
“A huge portion of Wall Street’s earnings were built around the model of ‘I’m going to bet against my clients. I’m going to regard my clients not as clients — and you can hear it in their language, but as counterparties. They should be sophisticated. And the fact that I’m on the other side of the trade shouldn’t bother them at all.’ You’ve heard all those expressions. And I sit there and I say, ‘This is your client.’ You should get up every morning… And my job is to figure out how my client can make more money, and I know that I’ll be rewarded doing that.”
On why Canadian banks fared better than their U.S. counterparts during the economic downturn:
“Canada was successful for a number of reasons, but I think regulation was one of the reasons. But the regulation is different than what I call American regulation. American regulation is prescriptive regulation, and Canadian regulation is principle-based regulation. And I think if you had to choose, you would choose principle over prescriptive. What Canada did was have very strong capital and liquidity rules. And then say to the CEOs, ‘You own the risk. This isn’t you run your institution and we try to catch you. You own the responsibility of getting your institution and running it the way that, if a crisis happens, you will survive.”
On whether the banking industry gets what it means to be an old-fashioned banker:
“With the Basel III rules, with the Volcker Rule, there’s tremendous regulatory pressure to say, ‘Why don’t you get back to old-fashioned banking?’ And I think there are some of us that cheer that and say that’s fundamentally right.”
On whether he believes regulators want to see a return to old-fashioned banking:
“Fundamentally, yes. They realize that this speculation put the whole banking system at risk. Given, frankly, the privileged role we play in society, and I think it is a privileged role, then we should not play that privileged role and be speculators. That doesn’t mean that you shouldn’t have hedge funds and speculators if you want to. But what you have to do is be prepared to let them fail.”
“One of the biggest mistakes we made was trying to save Long Term Capital. If we would have let Long Term Capital fail, we would have said ‘you want to speculate, you go down; everyone involved is going to pay the price.’ I think we have to drive that activity out of the bank and say ‘if you want to speculate, don’t call yourself a bank, call yourself a hedge fund.”
On other bank CEOs who say that what motivates them is serving customers:
“I think there are lots of bankers who actually do believe that. And then there are other bankers who say that and meanwhile they have a whole wing of their operations that isn’t actually doing that and saying, ‘I’m going to short the guy I just sold this product to.”
On whether other bank CEOs serve their shareholders ahead of clients:
“In a sense we’ve taken the shareholder value attitude to the extreme, and saying, ‘All we’re here to do is make as much money for the shareholder in the shortest period of time. Oh and, by the way, we’re going to structure our compensation so that we also make the maximum amount of money in the shortest period of time.’ I don’t think that’s a very good business model.”
On whether the focus on short-term profits and compensation offends him:
“I just think it’s a mistake. You know, I’m not a moral judge. I just think it was a mistake and we ought to get back to what banking should be doing, which is making the economy grow.”
On what he believes is a fair trade-off between safety and soundness and profitability and returns:
“We’ve shown that you actually can run an institution with adequate capital, adequate liquidity and be, as you know, if you take a look at North American banks, pick any period you want, we’ve been the best performing bank in North America.”
See the full interview here.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.