Contents
Imprint 5 Imprint All rights of distribution, also through movies, radio and television, photomechanical reproduction, sound carrier, electronic medium and reprinting in excerpts are reserved. © 2022 novum publishing ISBN print edition: 978-3-99107-884-5 ISBN e-book: 978-3-99107-885-2 Editor: Hugo Chandler, BA Cover images: Korn Vitthayanukarun, Mikeaubry | Dreamstime.com Cover design, layout & typesetting: novum publishing Images: Dr Anders Kjellman & Dr Taisto Kangas & Dr Risto Tainio, unless specified in the text www.novum-publishing.co.uk
Highlights 6 Highlights It was the best of times; it was the worst of times. It was a time when banks were expanding and then surprisingly exploding … like atomic bombs. And it was difficult to understand what really happened afterwards. It was the beginning of the Age of Nuclear Finance. The Global Financial Crisis followed in the footsteps of the creation of the US shadow bank market and exploded with the default of Lehman Brothers in 2008. The Coronavirus, COVID-19, also emerged unexpectedly in 2020 and exploded, sending shock waves all over the world. The purpose of this book is to analyse and provide guidelines on how bank managers and customers can adapt to the challenges being faced during the Fourth Industrial Revolution. There has never been so much money, nor so much regulation around. And the banking sector is changing, due to negative interest rates, disruptive financial innovations and technology. We live in a finance-driven digitalised world. Bank management is different from company management. As a bank manager, you are responsible for a longer period of time than a company manager, who is ‘only’ responsible until the guarantee period elapses. Experience is one of the best assets in banking. Real life working experience from banking, entrepreneurship, finance or industry is often required in order to understand what the present, past and future might bring. And do remember to be aware of the halo effect in banking! Do you know what halo effects are? One of the worst halo effects is a celebrated, strong, feared leader. We have seen many banks fail due to strong leaders. Bank managers must manage trustfully and honestly, for they have the ultimate responsibility for our money all the time. We argue that bank teams should work like a jazz band – playing together in order to create wonderful music in global, national, and local banking arenas. We have conducted and experienced both bad (wrong) and good (right) bank management. The patterns of both types of bank management will be analysed. Bad banking is easier to analyse because it involves elements of errors, mistakes, legal consequences, scandals, fraud, bad results, internal investigations and news headlines. We will provide some guidelines concerning what and how a bank manager should identify the banking business in a finance-driven digitalised world! We have evidence that it is possible to show, in a concrete manner, how a banker can start to improve the performance and the results with our new 5M-model. If you are interested in real and good bank management in this finance-driven digitalised world, then this is the book for you.
Biographical notes 8 Biographical notes Dr Anders Kjellman is the Managing Director of AKC Ltd. He is the former Chairman of the European Investment Bank’s activities in Africa, Asia and Latin-America and a former Professor at Hanken School of Economics. He has also been a Board Member of the Nordic-Baltic Investment Committee, that monitored the ownership in the Baltic Investment Programme and many Baltic banks. He was a Senior Financial Advisor at the Ministry of Finance, Finland, and aided IBRD, EBRD and other banks. He is the author of several books and articles on bank management and entrepreneurship. Dr Taisto Kangas is a former Bank Manager with over 30 years’ experience as manager of the Oulu Savings Bank, the Finnish Savings Bank Group and was the predecessor of Nordea Bank, MeritaNordbanken. He gained international bank experience from Pittsburgh National Bank, American Express Bank and over two decades of co-operation between Der Sparkasse Leverkusen and Oulu Savings bank. He acted as an advisor concerning the financial crisis in Estonia. Dr Risto Tainio is a Professor Emeritus of Organisation and Management at Aalto University. He has been a visiting scholar at European Institute for Advanced Studies in Management (EIASM) and Stanford University. He is the author and co-author of several books and articles on the restructuring of banks, and the transformation of the business system, in the era of emerging investor capitalism. The information and views outlined in this book are those of the authors and do not necessarily reflect the official opinions of employers and co-operating banks and firms.
1 - INTRODUCTION 9
The purpose is to describe patterns of good and bad banking practice 20
2 - BANK MANAGEMENT IS CHANGING 27
Change, data, methodology and experience 30
Bank managers are affected by culture, environment and egos 33
On the content of a bank manager’s work 37
On Halo Effects and complexity in banking 40
About the banking business 43
Forms of asset versus liability management 46
More about the complexity of banking 48
3 - AN OVERVIEW OF FINANCIAL MARKETS AND THE FUNCTIONS OF BANKING 50
On the financial market structure 50
The rise of finance in the world economy 53
On the functions of banking 59
The banking architecture: arenas and actors 62
About the actors of banking 63
Different types of banks and their market areas 64
Central banks 64
Global and national banks 65
National banks 65
Local and parochial banks 66
Shadow and casino banks 67
Different levels and dimensions in banking 70
About banking control and instruments 72
About the instruments of banking 75
The process of bank lending: different debtors, loans and instruments 77
About the financial sources of investments 80
Why is bank lending so difficult? 83
About risks in bank lending 84
Risks and a bank manager’s space to move 91
Weak information on debtors 93
About problems of the pricing of credits 95
Is bank management different from firm management? 96
Are there parallels between bank and firm management? 97
On the balance sheets of banking and the health triangle of a bank 101
Does a bank manager remember to see off-balance sheet positions, liquidity positions and …? 103
Combining a firm’s performance with financing decisions 106
Traps in a bank manager’s work now and in the future transition 112
About banking actors’ common faults 116
About bad bank management or the lack of the 5M’s 117
4 - BAD TIMES, BAD LUCK AND BAD BANKING 121
Introduction: You need to be lucky! 121
Patterns of the decline process in banking 126
Previous descriptions of decline in banking and bank mergers 130
Remarks concerning mergers as a recovery recipe 136
The case of the mergers in the savings banks group 137
The case of Nordea 140
The rest of the merging banks in the first merger wave 143
The financial crises triggers a new bank merger wave 145
A model of bank decline and bank mergers 146
Pre-stage: The Growth stage 147
Stage 1: The blinded stage 147
Stage 2: Denial of risk and inaction to maintain or obtain needed own capital 149
Stage 3: Crisis 150
Stage 4: Bank mergers as a recovery recipe 151
Stage 5: No choice, belly up … or merge? 152
Summing up on managing bank decline 155
5 - ON GOOD BANK MANAGEMENT 158
The hard part is to figure out what works well today … and far beyond tomorrow? 158
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