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Insights from Davos 2014
January 27, 2014
Trust MeltdownDespite good results from a few banks and financial institutions when reporting their numbers in 2013, the image of the sector is at an all-time low on television news.
According to research presented Thursday at the World Economic Forum, less than 10 percent of the U.S. news stories about banks are positive while 60 percent are clearly negative in tone.1 Banks are strongly criticized for their products and services, executive compensation, scandals linked to money laundering, tax evasion, and currency manipulation, as well as persistent doubts about the strength of their balance sheets.
Banks are presented by the media not just as harmful or unethical, but as threatening to the well-being of society in a manner similar to the way organized crime, terrorism, and dictatorship are portrayed. Improved financial results are not enough to fix their battered image.
Make no mistake, trust is fading across the entire industry and is not specific to individual banks.
Should banks feel concerned about this situation? Well, the amount that banks are paying in fines to regulators has increased significantly since 2007—even if the sums concerned are relatively small compared to the revenue of major financial institutions.2 Over the same period of time, banks have also had to pay out very large sums to settle litigation and cover associated legal fees. According to some estimates, the six biggest U.S. banks have accumulated $103 billion in legal costs since the financial crisis, more than all dividends paid to shareholders in the past five years.3
Such a poor, unprecedented reputation in television media is driving the increasing public concerns about banks and their role in society. This in turn, fuels calls for increased oversight and regulation of the sector.4,5
An even more important reason why banks should pay more attention to their battered reputation is license to operate. In the wake of the Fukushima Daiichi nuclear disaster, it only took the German Federal government a few weeks to withdraw the license to operate of the entire German nuclear industry and establish a new nuclear-free energy policy for the country.6 Politically, this was a relatively easy thing to do for a very unpopular industry.
The U.S. Federal Reserve is currently considering reversing a decade-old ruling that lets banks trade physical commodities, such as cotton, corn, aluminum, gold, silver, and electricity. The banks were permitted to expand into commodities markets in 2003, but the central bank says that it’s reviewing the policy amid Senate scrutiny of whether such involvement allows Wall Street firms to control prices. The ten largest banks earned approximately $6 billion in revenue from commodities in 2012, including dealings in physical materials as well as related financial products.7
With neither top management nor accounting trusted banks have few options on which to rebuild trust. Can the banks’ trust capital be restored? The short answer is “possibly,” but it will take a long time to undo the accumulated negative image. It will require a lot of transparent and sincere dialogue to rebuild trust with the banks' many stakeholders—improving CSR reporting by confronting the material issues of interest to stakeholders would be a good place to start this process.
1Maltese, R. and Schatz, R. (Jan. 24, 2014). "5 Years of Ongoing Trust Meltdown: Banks’ Image Now at All-Time Low." Presentation given at the Media Tenor Reputation Lab, World Economic Forum, Davos, Switzerland.
2Raymond, N. and Stempel, J. (Nov. 9, 2013). "U.S. Seeks $864 Million From Bank of America After Fraud Verdict." Reuters. Retrieved from http://www.reuters.com/article/2013/11/09/bankofamerica-hustle-idUSL1N0I...
3Griffin, D. and Campbell, D. (Aug. 28, 2013). "U.S. Bank Legal Bills Exceed $100 Billion." Bloomberg. Retrieved from http://www.bloomberg.com/news/2013-08-28/u-s-bank-legal-bills-exceed-100...
4Geiger, K. and Wingfield, B. (Aug. 2, 2013). “Banks Replacing Enron in Energy Incite Congress as Abuses Abound.” Bloomberg. Retrieved from http://www.bloomberg.com/news/2013-08-02/banks-replacing-enron-in-energy...
5White, M. (Sept. 26, 2013). “Deploying the Full Enforcement Arsenal.” Speech given at Council of Institutional Investors Fall Conference, Chicago, IL. Retrieved from http://www.mondovisione.com/media-and-resources/news/deploying-the-full-...
6Nicola, S. (Nov. 14, 2013). "Merkel takes Germany from nuclear energy to green." Bloomberg. Retrieved from http://www.businessweek.com/articles/2013-11-14/2014-outlook-germanys-gr...
7Ivry, B. (July 22, 2013). "Wall Street Commodity Trading in Jeopardy Amid Fed Review. Bloomberg. Retrieved from http://www.bloomberg.com/news/2013-07-22/wall-street-commodity-trading-i...