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A lender’s look at ethics

Bankers must keep their brasswork bright

A lender’s look at ethics

We have “big picture ethics” today, the stories we’ve been reading about for the last few years. And then we have “close up ethics”—the decisions every banker, every business person, makes every day of their careers.

Big picture ethics, and time for reflection

Last week, in “Fines and penalties shouldn’t be a cost of doing business,” we talked about the enormous bills that the very largest banks paid to the government for alleged misbehaviors. That aggregate number for the three top banks ranked by assets coupled with the associated legal costs most surely exceeds $100 billion by a considerable margin.

The central question to me is, were the behaviors that are the subject of the sanctions deliberate and willful? Or did the banks simply mismanage the problems, either with inattention or the application of ineffective activities?

In other words, what do we have here?

Ethical cupidity?

Or ethical stupidity?

Another issue is what you might call “ethical inheritance.”  No matter how egregious a set of behaviors appears to be, if they occurred under different ownership, should the acquiring company be judged as if it had direct responsibilities for those behaviors? Activities attributable to Merrill Lynch or Countrywide before their acquisition by BofA  are examples of this. The legal term is “successor liability.”

The sheer size of the fines and penalties and the unquantifiable hits to the good names and reputations of virtually the entire industry since 2007 are testimony to the seriousness of the problem. We all continue to feel the sting of public approbation of “greedy” bankers and other similarly odious references.

Time for some soul-searching, corporately and personally

Probably none of us shares any direct blame for these problems, but we all continue to live and work under the same cloud of suspicion and mistrust.

We can’t do much about that. But we can take an introspective look at our own business ethics as bankers and bank lenders.

A simple definition of ethics from Webster’s Dictionary:

Ethics: n. Values governing a particular group.

The values of our respective institutions are normative in this sense. If each of us acts consistent with these values, then we can be described as acting ethically.

In this light, we should then examine our corporate mission, vision, and values statements.

Very few of these documents throughout our industry fail to include references to acting ethically and honorably in our dealings with our customers. It’s against these related and referenced criteria that we need to evaluate our behaviors.

If we don’t like what we see—a dichotomy between what we say and what we do—then we have work to do if we honestly choose to consider ourselves ethical.

I make such a point of this because we all know that there is seldom a perfect congruence or conformity between words and deeds. Talking the talk is always easier than walking the walk.

Getting down to ethical specifics

Here’s where I think we may be vulnerable in some of our actions.

We want our customers to be square with us.

This is the essence of the “Character” C in the Five Cs of Lending. Truth telling, customer to banker, is essential. Anything less undermines the relationship of trust. It can jeopardize the repayment of our loan.

But are we completely forthcoming with our customers?

• Case in point: Overdraft fees. These have been under scrutiny in recent years. If we argue that our overdraft fees compensate us for costs of processing, are we comfortable in asserting that a $35 fee for each of several overdraft items is an appropriate reimbursement for our costs on a particular processing day? Do we point out that we are arranging the order of presentment, say in amount from higher to lower, to maximize the probability of an overdraft balance whether that overdraft balance is inadvertent or not by the customer?

• Case in point: Loan terms and conditions. Do we fully discuss loan terms and conditions with all borrowers and guarantors? 

I was an expert witness in a case a couple of years ago where the borrowers alleged that they were not fully briefed on loan terms and conditions. In my own opinion, it was not clear that the bank had done that to a reasonable standard. The bank’s policy and procedures manuals were completely silent on the point.

• Case in point: Loan committee presentations.

When presenting a credit to the loan committee, how much do we say? 

The more we analyze the deal, perhaps the more we’re scaring the committee into thinking that a deal is excessively risky. And even if we address all the obvious questions that occur to experienced lenders to disclose in their write-ups and presentations, are we placing the proper emphasis on each? 

Are we shading the presentation of certain facts to get deals done?

Are we sure we’re not deliberately understating risk in the process?

Case in point: Incentive pay and company revenue targets, and what we hunt for as a result.

As we develop our business prospects, are we always looking for the types of deal or products that generate the best incentive payouts? 

What if a particular product has a good payout in our incentive plan but a slightly different product with a lower incentive payout would fit the customer better?

Do we think of the customer first? 

Or do we proceed to pitch a product, any product, even if it serves no valid or cost-effective purpose for the customer?

Are banks so obsessed with non-interest income goals that we are trying to sell anything and everything to a customer?  Are we at a subconscious level  (or, worse, at a conscious one) saying in effect:  “I have to sell five of these things this week and you’re sitting here at my desk so you’re going to hear my pitch?”

There have been allegations in the financial press just this week that one of the major banks has been automatically preferring an internal cash management investment product over competitive products. Comparative performance information that would have permitted a more comprehensive evaluation of value was simply not provided (if I understand the allegations properly).

Bottomline conclusion: We may not be as transparent as we probably should be, at times.

Learn, and grow, from experience

Probably none of these incidents rise to the level of aberrant or dishonest behavior. But we are participants in an industry that has historically prided itself on its character and integrity.

Each of us must guard against losing our industry’s historic sense of values and identity.

It’s time to put the last few years in the rear-view mirror. Move on. But learn.

It’s time to burnish our reputations. We need to start with the little things that make up the bulk of our day-to-day activities.

• Is everything we say true? 

• Do we believe it fully ourselves?

• Are we transparent in our words and deeds?  

If not, then something’s out of alignment.

And in such day-to-day misalignments resides the compounding effects of our reputation problems, rather than their collective solutions.

Keep your eye on your ethical North.

Ed O’Leary

Banking Exchange Contributing Editor Ed O'Leary, a veteran lender and workout expert, spent nearly 50 years in bank commercial credit and related functions, working with both major banks as well as community banking institutions. His last job before retiring was as the CEO of a regional bank headquartered in Alburquerque, N.M. He earned his workout spurs in the dark days of the 1980s and early 1990s in both oil patch and commercial real estate lending. O'Leary began his banking career at The Bank of New York in 1964, and worked at banks in Florida, Texas, Oklahoma, and New Mexico. He served as a faculty member and thesis advisor at ABA's Stonier Graduate School of Banking for more than two decades, and served as long as a faculty member for ABA's undergraduate and graduate commercial lending schools. Today he works as a consultant and expert witness, and serves as instructor for ABA e-learning courses. You can e-mail him at [email protected]. O'Leary's website can be found at

In mid-2016 O'Leary's "Talking Credit" blog received a bronze excellence award for the Northeastern Region from the American Society of Business Publication Editors.

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