Session Agenda

• Introduction
• Defined:
  • Trust
  • Integrity
  • Character
• Nationalization of Banks
• Liquidity Risk which crystallized out of mis-trust
• Nobel Prize for Economics, 2022
• Run on the Bank defined
• Silicon Valley Bank episode
• Harvard University Research Paper on Trust
• R.K. Talwar – eminent banker
• Barclays Bank’s story

 Trust, Integrity & Character of a Banker

• Even Though these words are used frequently in our life and we also use them very often in our daily walk of life, still, I want to know the correct meaning of these words, before delving into the subject.
• Hence, I made an attempt to see the precise meaning of these words from Cambridge Dictionary. 
• Trust: ‘To believe that someone is good and honest and will not harm you, or that something is safe and reliable’.
• Integrity: ‘The quality of being honest and having strong moral principles that you refuse to change’.
• Character: ‘The particular combination of qualities in a person or place that makes them different from others’.

 Trust, Character & Integrity of a Banker

• Integrity is doing good when nobody is seeing and trust is a belief in the reliability of someone's truth. Both are the valued moral and ethical goods for bankers and banking business. 
• We can say trust and integrity is the blood in the veins of banking business and without it there is no survival. 
• Most of the scandals and crises  are blamed on the lack of trust and integrity. 
• If we further discuss the need for trust and integrity in banking, we would address questions about what is morally required of bankers and why these requirements arise. 
• Banking is not only a business it’s a social responsibility and cause to maintain a good financial cycle of customers in a good and profitable way. 
• Bankers not only have to maintain the deposits of customers, lend them to fulfill their financial needs but also bankers have to play a positive role to maximize their funds with the best suitable investment and lending products. 
• The features of banking that make it different from other businesses, how they are chartered, governed, regulated, and operated. 
• Being a banker is commonly considered a special role that invites admiration, as well as some suspicion and resentment from the general public. 

 Bank Nationalization

• Incidentally, July 19, 2023, was hailed as the 53rd anniversary of bank nationalization in India, undertaken by then Prime Minister Indira Gandhi. 
• However, with the liberalization processes set in on our economy since  1991, the policy of nationalization is getting reversed and now we go for privatization of public sector entities.
• Still it is worth knowing the very purpose of bank nationalization in 1969.
• The character of the banking carried out prior to 1969 in our country changed. 

Trust, Character & Integrity of a Banker

• The banking business is custodian of people's money, their financial needs.
• People don't take their money with them and prefer to deposit them in banks. They manage their financial needs with banks, show their financial worth with bankers to have a better solution for their financial needs. 
• However, they don't discuss many of their financial matters with their blood relatives because they trust bankers more than their blood relatives and believe that bankers will take care of their funds in a secure and safe way. 
• So it is bankers prime social responsibility to take care of not only their funds but also take care of the customers and in the process they should not break customers’ trust and belief and bankers should maintain a secure and safe profitable business relationship with them to continue a successful and sustainable banking business.
• Because of these reasons, the celebrated Economist John Maynard Keynes defined ‘banking’ as an illusion.
• So long as the illusion persists, the depositor will get his money back and the banks will recover their assets. 
• In case any doubt arises in the minds of the public about a bank, then the worst happens – run on the bank. 
• Again John Maynard Keynes on doubt as follows:
• "Once doubt begins it spreads rapidly."

 Liquidity Risk

• In fact, the Nobel Prize for Economics, 2022 was given by the Nobel Committee for the research carried out by Douglas Diamond and Philip Dybvig on the topic – Banks acting as maturity transformation agents. The details are given below:
• Modern banking research clarifies why we have banks, how to make them less vulnerable in crises and how bank collapses exacerbate financial crises. The foundations of this research were laid by Ben Bernanke, Douglas Diamond and Philip Dybvig in the early 1980s. 
• Their analyses have been of great practical importance in regulating financial markets and dealing with financial crises.

 Nobel Prize for Economics, 2022

The Nobel Committee observed as follows:

• For the economy to function, savings must be channeled to investments. 
• However, there is a conflict here: savers want instant access to their money in case of unexpected outlays, while businesses and homeowners need to know they will not be forced to repay their loans prematurely (Inherent risk of banking). 
• In their theory, Diamond and Dybvig described how banks offer an optimal solution to this problem. By acting as intermediaries that accept deposits from many savers, banks can allow depositors to access their money when they wish, while also offering long-term loans to borrowers.
• However, their analysis also showed how the combination of these two activities makes banks vulnerable to rumors about their imminent collapse. 
• If a large number of savers simultaneously run to the bank to withdraw their money, the rumor may become a self-fulfilling prophecy – a bank run occurs and the bank collapses. These dangerous dynamics can be prevented through the government or Central Bank of the country providing deposit insurance and acting as a lender of last resort to banks.
• Diamond demonstrated how banks perform another societally important function of bringing multiplier and acceleration effect in the economy. As intermediaries between many savers and borrowers, banks are better suited to assessing borrowers’ creditworthiness and ensuring that loans are used for good investments.

 Failure of Silicon Valley Bank

• Take the case of failure of Silicon Valley Bank, US in the month of March, 2023 – this year. Let us see the sequence in this regard:
• Silicon Valley Bank (SVB), facing a sudden bank run and capital crisis, collapsed on 10th March, 2023 and was taken over by federal regulators.
• It was the largest failure of a US bank since Washington Mutual in 2008.
• First, there was the Federal Reserve, which began raising interest rates a year ago to tame inflation. The Fed moved aggressively, and higher borrowing costs shattered the hopes of tech companies who were the main customers of SVB.
• Higher interest rates also eroded the value of long-term bonds that SVB and other banks gobbled up during the era of ultra-low, near-zero interest rates. SVB’s $21 billion bond portfolio was yielding an average of 1.79% — the current 10-year Treasury yield is about 3.9% at that time.
• At the same time, venture capital began drying up, forcing startups to draw down funds held by SVB. So the bank was sitting on a mountain of unrealized losses in bonds just as the pace of customer withdrawals was escalating.
• On 08/03/2023, Wednesday, SVB announced it had sold a bunch of securities at a loss, and that it would also sell $2.25 billion in new shares to shore up its balance sheet. That triggered a panic among key venture capital firms, who reportedly advised companies to withdraw their money from the bank.
• The bank’s stock began plummeting on 09/03/2023, Thursday morning and by the afternoon it was dragging other bank shares down with it as investors began to fear a repeat of the 2007-2008 financial crisis (read Systemic Risk).
• By 10/03/2023, Friday morning, trading in SVB shares was halted and it had abandoned efforts to quickly raise capital or find a buyer. California regulators intervened, shutting the bank down and placing it in receivership under the Federal Deposit Insurance Corporation.

 Run on the Bank - defined

• If the Bank’s liquidity is not managed well, it can lead to run on the bank. (latest example being Silicon Valley Bank in US) 
• A bank run occurs when a large number of customers of a bank or other financial institution withdraw their deposits simultaneously over concerns of the bank's solvency.
• As more people withdraw their funds, the probability of default of the bank increases, prompting more people to withdraw their deposits. 
• In extreme cases, the bank's reserves may not be sufficient to cover the withdrawals.
• Bank runs happen when a large number of people start making withdrawals from banks because they fear the institutions will run out of money. 
• A bank run is typically the result of panic rather than true insolvency. 
• A bank run triggered by fear that pushes a bank into actual insolvency represents a classic example of a self-fulfilling prophecy. 
• The bank, thus faces the situation of  risk  of default, as individuals keep withdrawing funds. 
• The chances are that what begins as panic may even turn into a true default situation for the bank. 

 Trust, Character & Integrity of a Banker

• Since banking cannot be conducted solely by bilateral market contracting but serves an inter mediation function between multiple parties, trust and integrity are requirements. 
• Second, the utility character of banking also creates a need for trust due to the dependence of the economy on banking services. So without integrity and trust there is no concept of banking business and bankers. while in modern banking the role of integrity of bankers increased. 
• Most of the people are unaware of traditional dynamics of banking and they are going to enter modern banking though it is more convenient and user friendly but still there is huge need of trust and integrity to develop sustainable relationships among the banks, customers and businesses.

 Harvard Research Paper on Trust

• As a leader, you want the people in your organization to trust you. And with good reason. 
• In our coaching with leaders, we often see that trust is a leading indicator of whether others evaluate them positively or negatively. 
• Fortunately, by looking at data from the 360 assessments of 87,000 leaders, we were able to identify three key clusters of items that are often the foundation for trust. We looked for correlations between the trust rating and all other items in the assessment and after selecting the 15 highest correlations, we performed a factor analysis that revealed these three elements. Further analysis showed that the majority of the variability in trust ratings could be explained by these three elements.

The Three Elements of Trust

By understanding the behaviors that underlie trust, leaders are better able to elevate the level of trust that others feel toward them. Here are the three elements.

1. Positive Relationships. Trust is in part based on the extent to which a leader is able to create positive relationships with other people and groups. To instill trust a leader must:

• Stay in touch on the issues and concerns of others.
• Balance results with concern for others.
• Generate cooperation between others.
• Resolve conflict with others.
• Give honest feedback in a helpful way.

2. Good Judgment/Expertise:  Another factor is whether people trust a leader is the extent to which a leader is well-informed and knowledgeable. They must understand the technical aspects of the work as well as have a depth of experience. This means:

• They use good judgment when making decisions.
• Others trust their ideas and opinions.
• Others seek after their opinions.
• Their knowledge and expertise make an important contribution to achieving results.
• Can anticipate and respond quickly to problems.

3. Consistency: The final element of trust is the extent to which leaders walk their talk and do what they say they will do. People rate a leader high in trust if they:

• Are a role model and set a good example.
• Walk the talk.
• Honor commitments and keep promises.
• Follow through on commitments.
• Are willing to go above and beyond what needs to be done. 
  • We wanted to understand how these three elements interacted to create the likelihood that people would trust a leader. 
  • We created three indices for each element and since we had such a large dataset, we experimented with how performance on each of the dimensions impacted the overall trust score. 
  • In our study we found that if a leader scored at or above the 60th percentile on all three factors, their overall trust score was at the 80th percentile.
  • We compared high scores (above 60th percentile) and low scores (below the 40th percentile) to examine the impact these had on the three elements that enabled trust. Note that these levels are not extremely high or low. Basically, they are 10 percentile points above and below the norm. This is important because it means that being just above average on these skills can have a profound positive effect and, conversely, just being below average can destroy trust.
  • We also found that level of trust is highly correlated with how people rate a leader’s overall leadership effectiveness. It has the strongest impact on the direct reports’ and peer overall ratings.

Do You Need All Three Elements of Trust?

• We were also curious to know if leaders needed to be skilled in all three elements to generate a high level of trust and whether any one element had the most significant impact on the trust rating. 
• To gauge this, we created an experiment where we separated leaders into high and low levels on each of the three pillars and then measured the level of trust.
• Intuitively we thought that consistency would be the most important element. Saying one thing and doing another seems like it would hurt trust the most. 
• While our analysis showed that inconsistency does have a negative impact (trust went down 17 points), it was relationships that had the most substantial impact. 
• When relationships were low and both judgment and consistency were high, trust went down 33 points. This may be because many leaders are seen as occasionally inconsistent. 
• We all intend to do things that don’t get done, but once a relationship is damaged or if it was never formed in the first place, it’s difficult for people to trust.

 R.K. Talwar, Ex-Chairman SBI

• Sri. R.K. Talwar(1922-2002) was a legendary Banker. He was widely  known and respected for his honesty and uprightness.
• HONESTY is the best protection'' is the message that greets everyone in the lift lobbies of the Mumbai Corporate Office of State Bank of India, when he was working as Chairman of that bank.
• It was painted at the instance of R. K. Talwar, (RKT) who was the Chairman of the bank at the time the building was commissioned. 
• RKT adopted honesty as an abiding principle of his life, but was wise to recognize that many others would try to be honest only if it were a protection and not policy. In his passing away, the country and its banking system has lost a titan.
• RKT presided over the destiny of SBI during a truly historic moment in Indian banking. 
• Until 1969, SBI was the only bank owned by the Government and had enjoyed a unique status in the minds of people; it was the biggest of them all. 
• By the nationalization of 14 other big banks in 1969, the uniqueness of SBI was eroded and the other banks offered stiff competition to SBI. 
• By his foresighted and value-based leadership — he was the Chairman till 1976 — RKT placed SBI in such an unassailable position that it holds the top position even 25 years after he left the bank. 
• In any mention of RKT, his steadfast faith in wholesome values would come on top. Two instances are worth quoting. 

1. When it was indicated in one of the advertisements of SBI that it was safe to bank with the bank, a competitor complained that it might give the impression that other banks are unsafe institutions; RKT immediately appreciated the point and ordered the withdrawal of the advertisement. 

2. Another was during the mid-1980s, when the then Chairman of the bank was talking to a leading international banker in a foreign country. The SBI Chairman was not sure whether the foreigner had heard of SBI: the latter put the former at ease, saying that he well knew of SBI, as the biggest Indian bank, "that can do no wrong". This compliment was earned by SBI only because of the legacy left behind by RKT.

• RKT's foresight was exceptional. It was he who saw that the organizational structure and systems of the bank needed a thorough overhaul in 1970 and commissioned consultants to study the matter and suggest suitable corrective action. 
• This was particularly needed as SBI's network of branches grew in geometric proportions from around 250 in 1955 (with a 150 years existence) to 650 in 1960 and over 8,000 in the next 20 years. 
• He chose two brilliant academicians from the Indian Institute of Management, Ahmedabad, as consultants, in preference to foreign firms. His main brief to them was that the bank had "lost its branch managers and they have to be brought back to the mainstream.‘’
• That he, as Chairman, could empathize with the front line staff speaks volumes of his commitment to the organization. The reorganized structure that he put in place had verily stood the test of time and, but for some modifications, was in place for well over two decades.
• Men of vision are generally uncomfortable poring over details and usually leave the tiresome job to their glorified assistants. Not so, RKT. 
• He was totally comfortable with detailed analyses of any complex problem and would go to the core of the issue immediately. And, the best part of it was that any formidable office note did not stay on his table overnight. The imprint of his incisive brain was quite visible in the perceptive comments that he made on the note. 
• He was truly a man who clearly "saw both the trees and the whole forest.''
• RKT was also readily accessible to all the people working in the bank and he did not take offense at certain remarks at which lesser mortals would have taken serious exception. 
• An instance was when he visited the bank's staff college in Hyderabad and addressed a gathering of newly recruited probationary officers. One newly recruited officer asked him as to what qualities made him Chairman of the bank. RKT politely replied that there was nothing extraordinary in him, but devotion to duty and the blessings of the Divine.
• RKT trusted people and groomed all those working under him to shoulder higher responsibilities. He used to tell his trusted subordinates that they could well exercise up to his powers in an emergency and report to him for ratification later. Even if the decision taken by the subordinate proved to be wrong, RKT stood by the decision. By demanding perfection from his people, RKT ensured that they became professionally strong.
• In business development, RKT's contribution was phenomenal. He joined the then Imperial Bank in the 1940s when the bank gave loans only to the "reputed'' business houses in the country and little, if any, scrutiny of the client's financials and other factors was done.
• He insisted on proper examination of the factual financial position of all the big borrowers and did not go by their mere connections or past reputation. 
• Much before the Tandon Committee prescribed norms for financial analysis of big borrowers, at the instance of RKT, systems were in place in SBI to ensure that the bank's funds were put to proper use. 
• In fact, almost alone among his peers then, RKT was quite comfortable with studying in depth, financial data of borrowers.
• RKT was fully committed in words and deeds to truth and honesty. Raj Kumar Talwar was not a mere prince, but a mighty Emperor among honorable men.
• He could achieve all such laurels as Banker based on the three pillars:
  • Trust, his colleagues enjoyed him.
  • Integrity, with which he worked for SBI
  • Character he owned and practiced which separated him from other bankers. 

 Companies with exceptional Core Values

• We have seen the Trust, Integrity and Character shown by an individual banker, which is equally applicable to Institutions also. One institution which comes to my mind instantly is Barclay Bank, UK.
• Barclays was built over centuries. Its longevity is an extraordinary achievement, especially against the backdrop of multiple financial crises, international conflicts, and the agricultural, industrial and now technological revolutions.
• This story is best told through our rich archive of photographs, ledgers, letters, minute books, equipment and a range of, in some cases unexpected, curiosities housed in the Barclays Group Archives in Manchester, UK. The material in these archives is unique, irreplaceable and priceless. They don’t just tell the story of Barclays’ businesses around the world, they also communicate the strength and depth of the Values that have underpinned Barclays from the very beginning.
• And it’s not just the story of a bank – it is the story of the communities that it serves, as well as its colleagues, its buildings, and its products. The archives allow us to share those stories.

Barclays Bank - Our Purpose is:

• Finance is the oxygen of the economy. Acting transparently and with expertise, we deploy finance responsibly to support people and businesses. We have the capability and capital, the operational resilience and the commitment, to make a real and lasting difference to the economic lives of customers and communities. This is as true today as it was when our bank was founded over 330 years ago. 
• Acting with empathy and integrity, we aim to be a leader in the profession of banking and to engender trust amongst our key stakeholders. We understand the power of building a supportive and inclusive culture for everybody, knowing that we make a bigger difference when we pull together as one team.
• We operate with energy and imagination, championing innovation and sustainability, to make a positive and enduring difference, to take pride in living things better than we found them. New ideas and technologies can help customers and communities to unlock opportunities.
• Our success is judged not only by commercial performance, but also by our contribution to society, and how we act responsibly for the common good and the long term, because these outcomes are mutually dependent. We are at our best when our clients, customers, communities, and colleagues all progress.

 Barclays Bank with exceptional Core Values

Our Values (which reflects the Character of the Institution)

• Our five Values – Respect (comes out of Trust), Integrity, Service, Excellence and Stewardship – are our moral compass; the fundamentals of who we are and what we believe is right.

Respect

• • We harness the power of diversity and inclusion in our business, trust those we work with, and value everyone’s contribution

Integrity

• • We operate with honesty, transparency and fairness in all we do

Service

• • We act with empathy and humility, putting the people and businesses we serve at the center of what we do.

 That is the reason the 19th Century Victorian Banker and Economist Walter Bagehot said, ’A well-run bank needs no capital. No amount of capital will rescue a badly run bank’.