Is Lloyds Britain’s most boring bank?

Adam Barber  - Senior Research Associate, Future Economies Research Centre, Manchester Metropolitan University

For example, the authority within the bank to make strategic decisions is now devolved equally between three separate units. Internal governance has been further enhanced by the introduction of additional sub-committees who advise on a number of specialist issues.  Moreover, these new sub-committees have also been endowed with special powers which allow them to make direct challenges to the bank’s Board, the Audit Committee, the Board Risk Committee and the Group Chief Executive.  This has given Lloyds a much ‘flatter’ management structure which is able to respond to emerging risks in a much timelier manner.

While Lloyds, like many British banks, have continued to make headlines in relation to a series of governance failures, we should note that many of these regulatory breaches pertain to historical legacy issues which in many cases predate the financial crisis.  Indeed, it was Lloyds who in 2011 conceded their legal battle over the mis-selling of PPI, thereby setting a precedent which compelled others banks to follow suit, with the Group’s Chief Executive António Horta-Osório telling reporters that it was the ‘right thing to do’.

Moreover, the way in which Lloyds reward their employees has also changed significantly post-2008. Annual cash bonuses, which are widely accepted as being a key contributor to the crisis encouraging short-term risk taking, have been capped at a maximum of £2000 for all employees across the Group with share options replacing cash alternatives.  Furthermore, variable remuneration for all Executive Directors is now payable exclusively in shares.  As such, bonuses for employees have taken on a distinctly long-term outlook tying employee incentives to the sustainable economic welfare of the Bank and its shareholders.

Despite a myriad of issues, such as the mis-handling of PPI claims and the rigging of both Libor and the REPO Rate Benchmark, which continue to plague the bank, Lloyds do appear to have turned a corner and I would argue that they have begun the long journey towards becoming Britain’s most boring bank.  This is important, not least because the balance sheets of Britain’s ‘big four’ banks remain enormous and individually, as well as collectively, continue to pose a huge threat to the domestic economy.

However, while Lloyds appear to be a more risk averse institution post-financial crisis, we cannot ignore the human cost of this restructuring which has resulted in some 57,000 redundancies as the group looks to make ‘cost efficiency savings’.  These job cuts, and the effects of unemployment felt by staff and their families, have come against a backdrop which has seen Lloyds continue to make exuberant bonus payments and which has made Horta-Osorio Britain’s best paid banker.

Despite this, Lloyds appear to remain an outlier rather a trailblazer for boring banking. While Royal Bank of Scotland, like Lloyds, have made some impressive progress on the structure and composition of their balance sheet; diversifying their funding base and reducing reliance upon wholesale markets, the group have also increased the percentage of total funding being dedicated towards lending activities.  However, this increase in lending has also witnessed an upward trend in the number of impaired loans since 2008.  RBS have also been embroiled in series of governance failures which point towards a breakdown of internal checks and balances.

Likewise, HSBC, Britain’s largest bank, have also failed to embrace the boring banking model exemplified by Lloyds. Indeed, while HSBC have shed a number of assets across North and South America the group continues to operate an enormous balance sheet.  Rather than retrenching their business on domestic retail markets, as advocated by Professor Kay, the bank have instead recently announced a so-called ‘pivot in to Asia’ suggesting that HSBC, like RBS, are not yet ready to embrace the boring banking model.

Barclays too appear to be shunning the boring banking model. While the bank now operates a much smaller balance sheet than in 2008 and has begun the run-down of their investment bank, trading liabilities as a percentage of group assets have increased.  Barclays has also largely failed to reduce their reliance upon wholesale markets and they have been plagued by a series of governance failures relating to money laundering, tax avoidance, the rigging of Libor, so-called ‘Dark Pool’ trading and the manipulation of gold prices.

Were Britain’s other big banks to follow the more traditional ‘boring banking model’ that Lloyds appear to have embraced then I suggest that the potential risk posed to the domestic economy by these systemically important institutions would be mitigated and lessened. This could therefore lead to a more stable and robust financial sector and domestic economy.  However, at present Lloyds appear to be an outlier rather than a trailblazer.