By Ashok Vemuri, Infosys Technologies
Though you wouldn't know it from reading today's headlines, America's banking history is one littered with a number of principled and driven personalities who went to any length to maintain the public's faith in the financial system as a whole. In October of 1907, John Pierpont Morgan rounded up a consortium of his contemporaries to stem a potentially disastrous run on the Trust Company of America. Personal wealth was pledged, handshake agreements were made and kept, and in the end confidence in the United States' banking system was restored-at least for the time being.Morgan's exploits helped build a foundation of banking trust which, until recently, has been the driving force of capitalism around the world. Sadly, as we look at the current scenario, "trust" is the last descriptor anyone would use to describe the American financial system's current underpinnings. Amongst the world's politicians, intellectuals, and businesspeople alike there seems to be an overwhelming lack of confidence in the ability of America's banking leaders to not only lead the world out of this current downturn, but to prevent it from happening again. It is apparent that the foundation Morgan and his descendants worked so hard to build throughout the 20th Century has been battered by a torrent of sub-prime loans, collateralized debt obligations and credit default swaps. World luminaries are not alone in their concerns, a mid-October 2008 Gallup survey found that only 21 percent of American consumers polled were confident in U.S. banks-the lowest percentage in three decades and a precipitous drop from the 40 percent who responded favorably in mid-July. More recent data stacks up similarly: According to a survey released in late January by the Boston Consulting Group, 46 percent of Americans polled indicated that their trust in banks has been affected negatively by recent events. The arrival of Spring has done little to thaw prevailing consumer negativity-a late-March survey released by Waggener Edstrom Worldwide and RT Strategies revealed that only an astounding 8 percent of Americans maintain full confidence in U.S. banks and financial institutions.
Montek Aluwalia, the Deputy Chairman of India's Planning Commission put it aptly at this year's Davos World Economic Forum, when he quipped: 'It's been said that confidence grows at the rate the coconut tree grows and falls at the rate in which the coconut falls.'
It has become glaringly obvious that the American banking community is currently facing a crisis of confidence and it needs to act quickly to regain and rebuild the trust of its consumers and its colleagues.
The recently completed stress tests mandated by the Obama Administration are a great start, if only because they provide what many believe has been lacking in the U.S. banking system-a semblance of transparency. For years, consumers viewed banks in the United States as bastions of stability. Much of this belief in the banking system was driven by a sort of blind faith, faith that is now eroded. Most consumers just assumed that their bank was healthy, an assumption which most know no longer holds water. To reclaim lost trust, banks should adopt the strategy of proactively informing and enlightening various stakeholders of their health. Liquidity, credit and market risk information made available to consumers, regulators, shareholders and various banking partners would drive the rebuilding of systemwide trust. Consumers and counterparties would feel more secure, providing participating banks with a large competitive advantage over "non-transparent" peers. Perhaps most importantly, such an initiative would go a long ways towards preventing a repeat of the financial meltdown which wiped out trillions of dollars in shareholder value.
The success of a transparency initiative hinges largely on technology. Real-time liquidity and risk management systems are a must, as are systems which can effectively measure systemic and interbank risk (i.e. second round and contagion exposure). Obviously, as more banks participate and release their information, such risk would be easier to calculate. The development of a reporting system and information dissemination process becomes the final piece of the transparency puzzle. Information should be reported in an easily interpreted, consumer-friendly format and not just distributed, but announced, trumpeted, and discussed. For, in today's technology-driven world, a handshake from John Pierpont Morgan is no longer enough-information and transparency drive the credibility which builds and sustains trust.
Ashok Vemuri is a member of the executive council and global head, banking and capital markets practice, at Infosys Technologies.