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1 - INTRODUCTION

We live in a finance-driven digitalised world.

We live in a world of nuclear finance!

The post-industrial society has been called many names; the information society, the service society, the risk society, the internet society, surveillance capitalism, the fourth industrial revolution, and the climate change society. However, we cannot escape the impression that we live in a world of finance. We call this a society driven by finance. The post-industrial society is not driven by industrial logic. Instead, it is transformed by financially driven forces. Today profit is accrued primarily through financial channels, rather than through trade and production. One can see traces of financialisaton everywhere and financial news often dominates the business media. In this society, the financial institutions, bank managers, technology developers and authorities are the most significant agents of transformation! The central banks all over the world are feeding the next potential nuclear meltdown through excessive quantitative easing (QE) i.e., the massive printing of new money.

If you want to better understand the current ongoing transformation of the financial system in a digitalised post-industrial society, then this is a book for you! We will describe a bank manager’s work in a new way.

The book will deal with:

 the complexity of banking,

 different types of banks,

 financial system transformation away from deposits to digits,

 mistakes and errors,

 bad bank management,

 good bank management and great bank leadership,

 why you should start with why,

 disruptive financial innovations,

 platform economics, and

 the future of banking.

Why should you read a book like this? It is a book that will fill the textbook gap between economics, financial management and good bank management. If you want to better understand the transformation of the banking industry and our society, then this is a book for you!

The main reason for writing this book is to shed light on the challenges bankers are facing! From a holistic point of view, we will look at what you can expect as a bank manager? And what your best response options are?

This book will help you to understand the transformation and potential risks in this age of financialisaton; an age which we call the “Age of Nuclear Finance”. We argue that one can see the economically driven world as a set of atomic reactors (bombs in the worst case), that may set off a series of nuclear chain reactions. These reactions can be as surprising as the coronavirus pandemic in 2020. Other potential sparks that can set off a nuclear meltdown of the financial system include traditional over-indebtedness in the housing sector (of countries, corporations and ordinary customers) to lost trust!

In the late twentieth century, Gregory Millman (1995, vii) noted that: “we have witnessed a revolution in finance comparable to the discovery of nuclear power in physics”. This book attempts to describe how this revolution has evolved and what consequences it has and has had on bank management. We define nuclear finance as a finance-driven process in which there exist elements of uncertainty that can explode in a flash, with devastating (or positive) consequences; it is often only afterwards that you realise what really happened. Both negative and positive expectations can instantly cause a rapid chain reaction. In this respect we define nuclear finance differently from Sharpe (1993). We see nuclear finance more as five levels of risk exposure starting from 1) the individual level, 2) the financial institutional level, 3) the global macroeconomic level, 4) the level that relates to the technological development and/or 5) fraud. A nuclear-like financial reaction can without clear warning start at any of these 5 levels with a devastating outcome, i.e., on the individual level you can lose ‘most’ of your financial resources due to a plethora of reasons such as cybercrime, identity theft, confiscation, war, bankruptcy, etc.

For decades, the World Bank and the IMF have warned about high levels of debt in China. At the same time, overvalued shares, derivatives or other financial instruments in the US, EU or Japan can, in a fraction of a second, initiate a new financial meltdown like the so-called subprime crises, which can also be called the Global Financial Crisis of 2008. Another example is when the world was quarantined during the “Corona Crisis” of 2020–1 (or COVID-19), followed by a meltdown of financial markets! The Corona Crisis of 2020 caused a deep fall on stock markets around the world; bank shares in particular dropped by 25 percent to 75 percent during the first quarter of 2020.

Banks and the management of banks have changed during recent decades. Along with traditional deposit and investment banks, a big group of shadow banks; “casino” banks, payment creators, trading platforms and payday lenders have entered into the financial markets. In addition to this, we are living in a world where bank managers and politicians find it difficult to understand the changing financial system. It is evident that not all bankers understand what is going on; however we hope that this book will cast some light on the complex issues of banking.

What is a bank manager’s role and effect on the rise of finance and in the transformation of financial systems? Is it even possible to tell? What we are saying is that today there are many unseen traps in banking, both for the banks and for the banks’ customers. However, by comparing bad, opaque (uncertain), complex banking, with good, distinct and transparent banking, you will be able to identify some of the factors behind good bank management.

In this book, we will analyse the changing content of a bank manager’s work and management. The bankers are facing change in many ways. They have to know and master aspects like customer assessment and risk management as well as support and create growth for customers and wellbeing for employees. We are interested in knowing if we need a different kind of bank manager and even different bank management in different bank arenas? We argue that a bank needs a management team, which should work together like a jazz band; wherein the team is collectively responsible for the results the bank achieves.

In 1923 the Banker Paasikivi (2000) noted “Banks are important and can be seen as the veins and arteries through which blood flows; without them – life as we know it – is not possible”; and we note that the role of banks is still to promote the business community, individuals and social development. The task is so important that society must demand more common good and higher moral standards in all bank arenas (von Fieandt, 1970).

It appears that bankers, throughout history, have become tired of traditional prudent banking and prefer higher gains and increased tensions instead. We have seen how greed transforms banks, time and time again. This seems to be a common factor behind many problems in the banking industry, both today and probably far into the future!

We have, in addition to central banking, identified three main ways of describing bank management in transition during the Age of Nuclear Finance:

1 Management in Credit-based Banking, i.e., local retail banking; there are still many banks that take in deposits and lend the obtained money as needed. Bank managers see and meet the customers of the bank. Management in credit-based banks has remained more or less the same, even if the digitalization of activities is ongoing. You need to be a trustworthy partner, who knows your customers, legal obligations, competitors and introduces new technology at a moderate pace. The financial result emerges mainly from fees and the difference between deposit rates and bank lending rates.

2 Management in Capital and Asset-based Banking; a transformation is occurring from a credit-based to a capital-based financial system. In a credit-based system, the depositors’ money is lent onwards, while in a capital-based system ordinary deposits are of minor importance. Instead, bank experts are taking over and influencing both the customers and the banks on where to invest assets. Traditionally this involved investment banking with mergers and acquisitions and trade finance. In the capital-based bank world, the bank manager is more of a report and number collector. In fact, the bank manger does not often see or have to meet the customers. However, the customers need a trustworthy, often regulated partner. In capital-based banking, the value for the bank is created through provisions, fees and asset management.

3 Management in global and shadow “Casino” banking: banking is facing global regulation, which leads to off-balance positions. The financial institutions are also facing a digitalization revolution, where business, shadow banking and politics are intervened in a blurred way into a nuclear financial cocktail. Shadow banking operates in various forms; from tax havens, to international payment platforms, such as PayPal, Amazon Pay, Alibaba (Alipay), Google Pay, WeChat Pay to hedge funds, casino betting, global insurance exposures, printing of e-money, fraud, money laundering, new derivative instruments, new instruments, investment banking.The profit from global shadow banking is mainly created from casino type managerial activities. You bet that share prices, bond yields, money instruments, derivatives, property and/or something else will go up or down. Some bankers are even interested in blockchain currencies, for example cryptocurrencies, which can be classified as typical casino, pyramid games deep in the world of shadows, with no regulation. This combination practised by shadow banks imposes a great systemic risk to the entire banking system in the world.

We argue that we can make the market more understandable by dividing the bank market into three types of markets, i.e., the 3Cs – credit, capital, and casino-based banking. A fourth C could be on its way, i.e., Credit-trade-platforms like Alipay, Apple Pay, Google Pay, PayPal, WeChat Pay, etc. We have, however categorised the potential Fourth C under casino-based shadow banking. The over 2,400 cryptocurrencies that can be found today are like houses of cards and cannot be considered as “banking”.

In the first group of banks, i.e., credit-based banks, depositors are the key providers of money. The bank customers deposit “their wages” and other sources of income and the banks lend out the obtained financial resources. There are many different forms of credit-based banks ranging from small savings banks to large multinational commercial banks. The credit-based banks often specialise in a particular area, for example small local deposit banks. However, they can also be found as big and diversified global banks. These credit banks are often called traditional retail or deposit banks.

Also, the instruments of the financial institutions as well as competitive institutions have been evolving. Fast loan and payment providers from non-bank institutions have grown rapidly and transformed the traditional credit-based banks. PayPal, Alibaba, Amazon, Google and others have emerged in the “banking” market. Furthermore, today, few of Generation X, Y and Z (that is people born after the 1960’s) know what prudent banking is in practice, i.e., traditional banking with an honest touch. Another major transition relates to the changing mindset of the post-war generations. Therefore, it is important to consider what bank management really is? We are worried that too few realise that good and bad bank management means different things for different generations, as well as in different fields of banking, for example the objectives of banking are different if you are involved in traditional retail banking or in investment banking.

In the second group of banks, i.e., capital and asset-based banks, the major transition in bank management relates to the rise of capital markets around the world. There has never in our history been so much capital around as now! Bank managers today are selling capital-based products (instead of promoting savings accounts). As such, capital-based products are transforming the banks’ activities. Today it is common that customers save their capital in stock portfolios or funds administered by banks or other financial institutions. They are often technology-driven financial products with a high level of technical security issues. The capital markets, for example stock markets all over the world, have faced a remarkable increase in value over the last decades.

As Whitley (1999) notes, financial systems vary on a number of dimensions, however the critical feature deals with the process by which capital is made available and priced, through competition. However, in the current financial system, we can detect a number of disruptive payment platforms, cryptocurrencies and actors like Alipay, Apple Pay, Facebook Pay, Google Pay, PayPal WeChat Pay etc., that are transforming the traditional bank market.

The third group of banks, i.e., casino or shadow banks, relates to the internationalisation of customers, competitors, technology, financial institutions and central banks. The regulative burden and tax costs can be partly avoided by shadow banking based in tax-havens, or by creation of off-balance sheet entities. The objective of these non-regulated casino banks is often to maximise profit through avoidance of regulations and taxes. These banks are betting with their customers’ and their owners’ money on either value appreciation or depreciation of different financial products. The financial product range is huge and sometimes hard to fully grasp for a banker. Another fact is that the (too) big banks in the 3Cs markets are often too difficult for bankers to manage, because they have neither access to good data nor reliable enough facts! The fall of Lehman Brothers and the following collapse of the so-called shadow banking market in the USA during 2000–2007 is a good example of this third group of banking activity.

The Global Financial Crisis that followed led to the collapse of the financial system in Iceland, Ireland, Greece, etc. as well the collapse of the five largest investment banks in the USA. The problem today relates more to the excessive amount of money floating around in the world. One example of this is that the ECB in November 2019 again started “to print” 20 billion euros of new money per month with a negative interest rate, in addition to the already outstanding stock of QE (Quantitative Easing) money, which was initiated in November 2015 (ECB, 2019). In response to the coronavirus outbreak in early 2020, the ECB launched the pandemic emergency purchase programme (PEPP) of 1,350 billion euros. Similar QE programmes were launched by central banks all over the world. Under the ECB’s PEPP and the corporate sector purchase programme (CSPP), the maturity was raised up to thirty years and three hundred and sixty-four days (ECB, 2020).

Today, one can see that many banks are involved in all of the 3C banking groups, which makes the situation even more blurred and dangerous. Not only for the banks but also for the stability of the financial system.

Furthermore, national banking is facing a global digitalization dimension, where business and politics are mixing together to form a nuclear financial cocktail. The central banks in the EU and USA are greatly influencing the level of the short-term money markets rates of the world. One good example is found in the European Central Bank’s (ECB) decision to push the Euro Area interest rates into negative numbers, which cannot be seen as a normal situation. Negative market interest rates are not normal, they are anomalies that may be highly dangerous.

The most widely used market interest rate in the EU, i.e., the Euribor rate, has been negative since late 2014; in 2020 the ECB was signalling that it would continue to keep the steering rates negative. This means, in theory, that you as a customer have to pay for depositing euros into a bank. Negative market interest rates are a new phenomenon that bank managers have faced, in combination with a highly expansive monetary strategy from the ECB, the Fed and other central banks. During the last few years, payment platforms and different forms of blockchain technology have also enabled the creation of new currencies, such as cryptocurrencies. We argue that blockchain currencies, in combination with payment platforms, also create a serious threat to the banking system in the current global financial architecture.

Metaphorically we describe the current global financial architecture as a nuclear core, with the Fed, the ECB and the other central banks in the nuclear centres, together with the Bretton Woods institutions. The nuclear core is surrounded by the major financial centres (Wall Street, London, Frankfurt, Tokyo, Shanghai, Hongkong, Paris, Stockholm, etc.), the electronic herd (hedge funds, investment banks, shadow ‘casino’ banks, blockchain currencies, etc.) The present global financial architecture is shown in Figure 1.

Figure 1. Nuclear Finance – The present global financial architecture

The figure above is inspired by Friedman (1999) and Tainio, Huolman and Pulkkinen (2001), who have also described the present global financial architecture as a nuclear core. The figure presents a financial world with the central banks as neutrons, spearheaded by the multinational banks and financial centres such as Wall street, London, Hong Kong, Shanghai, Tokyo, Frankfurt also in the core, surrounded by an electronic herd of ordinary banks, hedge funds, pension funds, investment banks, shadow banking etc. All of these financial institutions are connected by one of the most powerful as well as disruptive innovations of our times, the internet.

Figure 1 shows the present global financial system and hopefully gives a sense of the interdependence of all the various actors. In the centre we find the Central Banks in the USA, Europe, China, India, Japan, Canada etc. working together with the International Monetary Fund (IMF) for short-term stability, and the World Bank, (WB, IBRD) and other Multinational Development Banks (MDB) to maintain a “long-term stable financial environment” in the world. This is not an easy task and a malfunction in any of the financial centres can easily spread a feeling of fear at lightning speed, which, in the worst-case scenario, may even cause a meltdown of the entire global financial system. The worst-case scenario is not the most likely scenario, however. Instead, a slow process of tension build up is a more likely outcome. This tension can then be defused at a slow or fast rate, a situation in which somebody usually loses, while others may gain. In late 2020, researchers at CERN found that the atoms do not only consist of neutrons, protons and electrons. A forth element dubbed “odderon” was proven to exist. “Odderon” or a glue that keeps nuclear cores as well as business cores together is what we are going to have a closer look at.

The purpose is to describe patterns of good and bad banking practice

Bank management and success in banking is a complex issue. It is about more than just understanding economics or some part of finance. When we studied the activities of successful and unsuccessful bankers, we noticed that truly value creating managing directors seem to master not only customer relations but also personnel relations and financial instruments. However, they are also able to grasp institutional history and its effect on the future of the financial institution. In other words, the good managers seem to be good at seeing the big picture of their banks and their role in the society of the future. This is also our starting point from theoretical perspectives that drives a good bank manager. After years of analysing successful bank managers, we have adopted a theoretical basis for this book. You will need to know about your past, your environment, your culture, your customers and your expected future before you, as a banker, will stand a chance of being successful in the long-term.

We try to provide a comprehensive and experienced-based introduction to issues relating to the work of bank managers. In Chapters 2 and 3 we will provide important and fascinating insights into the business of banking. A major reason for writing this book has been to fill a gap in the literature on bank management and bank performance, in practice. Another purpose of this book is to provide an institutional perspective on banking, so that we can learn from history, in order to increase the prospects for right moves in the uncertain future of banking. A third motive behind this book is to cast some light on the complexity of banking. We will provide descriptions and conceptualizations rather than explanations involved in the processes of managing banks and money.

What lies behind bad banking? In Chapter 4 we will analyse the steps behind banks that entered the history books as failures! A new and fascinating issue in the downfall of banks relates to the growth phase – often associated with a stigma of fear – which then develops into the crisis stages of banks in decline. We looked at three hundred and nine bank mergers and found that bank managers in many cases gradually lost their confidence concerning their capability to run their banks successfully, and then opted for a bank merger. The reasons behind mergers seem to be time and context dependent. In our model of bank decline, we see the role of the bank managers as crucial. The major reasons behind the recent wave of bank mergers seems to be bad bank management and real economic crises, caused by the global financial crisis that started in 2008, with the downfall of Lehman Brothers; and we can expect more bank mergers to occur after the 2020–2 coronavirus crisis.

Initially, we started out to investigate bank crises. We were puzzled by a lot of things. One surprising finding was that in banking, we (Kjellman, Tainio & Kangas, 2014) noted that decline cannot be understood without first looking at growth before the decline phase. In the early 2020’s, one can see a worrying amount of asset growth in the holdings of the Central Banks – and that is a source of problems in the future.

In previous times of crisis, bank managers in most cases gradually lost their confidence concerning their ability to successfully run their banks, and consequently opting for a bank merger. The mergers occurred after a bank growth phase among the banks. Some bankers became blinded and then led their banks into a crisis phase. Faced with two perceived options, i.e., to merge or to declare “bankruptcy”, the bankers naturally chose to merge. We argue that this perceived no-other-way-out-than-to-merge argument may be used to explain most bank mergers and failures. The “satisfactory” solution for the latent financial problems was seen by many managing directors to be to merge. We have seen how mergers were created by managers and authorities. They didn’t just happen! Instead, mergers were created in order to hide profitability problems, that could not be dealt with in an acceptable way.

The required shake-up of a bank did not call for a declaration of mistakes made by bank managers. The layoffs were blamed on the merger, and many of the bankers could continue as a bank manager or retire with a golden handshake. The board members were given an excuse for not previously seeing the emerging problems, often due to an omnipotent, ‘culture-of-fare’ Managing Director. The board of the bank opted for a merger and were then handed the argument that thereby they were doing something about the profitability problem. The personnel, who were not laid-off, were promised a future in the new banking organisation and thereby some of their lost trust could be regained. The customers were promised a larger and leaner bank that would offer an increased and improved service capability. In fact, the choice to enter into a merger seemed to be appealing, at least partly, to all of the involved stakeholders. And consequently, the problem of bad banking could be put aside!

Financial Institutions die at a surprisingly young age! Why? Is it due to economic fluctuation, a banking crisis, bank runs, bad management or halo effects? Is it a fact that so-called ‘great-man’ stories simply don’t work in banking? In our quest to figure out what might lie behind great banks, we initially had to define what good bank management is. We decided to define “good bank management as long-term, constant value creating banking activity that maintains good profitability both during good and bad times, while maintaining loyal customers, loyal owners and loyal employees (including managers)”. Our definition of good bank management supports the issue of long-term survival as well as the loyalty effect suggested by Reichheld (1996).

In Chapter 5 we will analyse good bank management! What are the factors influencing good bank management? The first big lesson of our study on good bank management and leadership is that you should apply a holistic view to banking. Look to the past and see where you are coming from. Look at your own and the bank’s current life space, i.e., the current situation. Make sure that you have sufficient funds of your own, good liquidity, a solid bank platform strategy, loyal owners and a staff that is motivated, well educated, and loyal. Look first to the past and then to the future and assess in which direction you, the customers, technological improvements, and the markets are going. Great bankers are often experienced and manage to motivate their co-workers. Therefore, they create a secure workplace, a stable rock, which enables the co-workers, customers, and the surrounding society to grow. It is hard to lead by example if you are not experienced, so having older employees is a good thing in prudent banking.

The second lesson to learn is responsibility. You as a banker are responsible for other peoples’ money! You should act accordingly. A bank’s greatest assets are its own capital, its people and its customers. Make sure that the workforce feels that they have a meaningful job, and that the bank has sufficient funds of its own. That creates trust, which is a key success factor. Don’t get carried away when the growth markets are smoking hot. Growth, particularly in connection to a boom in the housing market, has historically led to some of the worst banking crises ever seen, for example the 1930s Great Depression and the Global Financial Crisis that started in 2008; and it is during crises that bank management is tested to its limits.

The third major lesson to learn is that you need to know and help your customers and team-mates to grow. Follow your customers fortunes and grow with them. You should act in both a supportive and a controlling way. Stress WHY your bank exists and how you can grow together in symbiosis. The issue of meaning or WHY a bank exists is particularly important.

The basic risks in banking are still the same as throughout history: lending at the right prices to good customers; and how the funding behind the lending is generated are important considerations for a bank. Therefore, a bank manager has to remember that their bank is both a borrower and a lender. Banking is about TRUST between lenders and borrowers.

The fourth major lesson is to recall the 5Ms. We were somewhat surprised to find that technology level and bank platform management were not considered as key for successful banking. Perhaps this is because banking is more of an issue of trust than technology. Instead, we found that, regardless of which sector of banking you are working in (credit, capital or casino-based banking), the 5Ms of banking are relevant. The great bankers prioritise:

1 Money: have sufficient own capital, i.e., 1/10 of the balance sheet.

2 Markets: know your market(s) and customers.

3 Meaning: make banking easier by building your bank on values, for example supporting the surrounding community.

4 Me: equals We.

5 Memories: part of the magic of ongoing banking.Be modest and honest!

Good bank and business management is also about luck!

If you would like to improve your chances of success, we argue that you will benefit from this book! Learning from others and from science is an art that is well worth pursuing!

In Chapters 6 and 7 we look at the future of banking! We will have a brief look at what is needed for the continued success of banks during the 2020’s and beyond. Disruptive innovations are transforming the platform economies, which banking has turned into. In our joint-bank platform project concerning disruptive innovations and the challenges that banking faces, Kjellman, Björkroth, Kangas, Tainio and Westerholm (2019) saw that one part of the dilemma lies in the uncertainty of an ‘untested’ technology. Another challenge was finding the real ‘source’ of disruption, as well as the choice of appropriate methods for dealing with such disruptions in the current context. The father of disruptive innovations, Clayton Christensen, stresses the complexity of disruptive innovation and we do not know where financial bubbles like Bitcoin and other cryptocurrencies will take us. However, we do know what it takes to survive!

Being a first mover is often not a good strategy when it comes to the traditional business of banking! What we found was that a first technology changing strategy is probably not a great strategy in a highly regulated and conservative market such as the banking industry. In fact, we were somewhat shocked that we didn’t find banking technology to be one of the crucial factors behind great bank performance; and we are still puzzled by that finding. Still globalization and regulative changes are forcing banks to act, due to technological advancements. How we pay for our purchases is one of the disruptions affecting banking. What we recommend is that you learn from the mistakes of others and build your banking on solid value management.

In this book we do not describe the details of financial instruments. However, you are unlikely to become an excellent bank manager if, for example, you don’t know how much you should pay for a bond, an option or a common stock, etc. Although we will not focus on the valuation of financial products, we will have a look at what factors caused the great financial crisis of the 1930s, as well as the crisis in the early 1990s, the Global Financial Crisis starting in 2008, and the coronavirus crisis emerging in 2020. We will try to make markets and banks in transition more understandable. We will open a few of the black boxes in banking, for example, by looking at the disruptive innovations and the challenges for banking in the twenty-first century. We will also examine what good banking practice is all about.

Bank success and failure depends on good and bad management. Undoubtedly the performance of a bank depends on individual bankers and their capabilities, judgements and moral values. This book is also a tribute to bank managers, who have stood the test of hard times for example bank manager Sven-Erik Kjellman’s eloquence, courage, and perseverance that bound a bank and the banking system together, when other banks, firms and institutions were failing.