In this article from Japan's leading newspaper, Prof. Michael Böhm talks about talent in banking and how the market structure leads to inflated salaries and hinders innovation in the sector.
"Sunday Column (translated from Japanese)."
The treatment of former employees of Credit Swisse, which was rescued and merged with UBS, Switzerland's largest bank, is causing a stir.
UBS is expected to announce details of the job cuts by the end of August, and it is believed that more than 30,000 jobs will be eliminated as part of the merger.
Credit Suisse was once the symbol of Switzerland's financial capital. Where will its elite employees go?
"The public image of bankers is not necessarily good," says Claudine Esseiva of the Swiss Bank Employees Association, an organization of Swiss bank employees. The association is currently working to support bankers who leave the bank. However, she says, it is difficult to win the sympathy of the public.
When I visited Zurich in April, the financial center where both banks are headquartered, I felt the public's cold gaze on Credit Suisse. Many people, from experts to passers-by, criticized the attitude of Credit Suisse's management.
For one, people were upset that the company had departed from the solid Swiss financial tradition by emulating the U.S. and focusing on risky investments. As one economist noted, "They were naïve to think that the state would bail them out in the end because of the size of their own business, even if they failed with their investments." Taxpayers will not understand if a company is willing to make a risky investment and make huge profits if it succeeds, but asks the state to bail it out if it fails.
Stefan Legge of the Institute for Financial Research at the University of St. Gallen pointed out that "the managers of the giant banks should think about how much innovation and value the banks themselves have created." The reason for this is the declining position of banks in the domestic economy compared to the pharmaceutical and chemical industries, which are Switzerland's new growth engines. Mr. Legge said, "There is a difference between making profits and creating value." Compared to the pharmaceutical and chemical industries, which develop new drugs and products, banks are less able to create value through new innovations. There is even the joke that "the only innovation banks have created is the ATM."
German economist Michael Böhm and his colleagues published an interesting study on bankers last year. The study analyzed the salary growth of bankers in the United States and Sweden between 1985 and 2017 and compared it to the averages for all industries in each country - countries for which data is relatively easy to obtain. According to the study, bankers' salaries in both countries increased from 10% above the average for all industries to 60% above the average for all industries during that period.
The researchers compared bankers' intelligence quotient, high school graduation, teamwork skills, and leadership skills in 1985 and 2017 to determine if the salary increases were due to an improvement in bankers' skills. The results showed that bankers' skills themselves had not increased at all. Compared to secretaries and cleaners in other industries, bankers' and cleaners' salaries increased significantly for the same job. Böhm concludes that "the increase in bank salaries over this period had nothing to do with an increase in skills."
So why did bankers' salaries rise? Boehm explains, "Apart from deregulation, which has made them more profitable, the wealth of the world has increased, and the banks that handle it have made more money."
The study's findings remind us of an age-old criticism of banks. Banks attract the best people and pay them top-notch salaries, but may not be using their skills to the full extent of their paychecks. Of course, bankers are expected to be highly skilled in a variety of areas, including the ability to anticipate the economy and identify growing investment opportunities. Yet there is criticism that some people are not able to fully develop their skills within the confines of a bank.
Finance is not a particularly innovative sector," Böhm argues, attributing this to a lack of competition. "The banking sector tends to be an oligopoly, and it is easier for regulators to regulate an oligopoly. Oligopolies allow individual banks to make high profits, but they also inhibit technological innovation," he said.
Some also doubt that newly developed financial products and technologies will truly make the world a richer place. In their book, "Good Economics for Hard Times," Nobel economics laureates Abhijit Banerjee and Esther Duflo write, "Why should young people who could develop more socially useful products and services be hired by banks to write software for high-frequency trading (HFT)?"
UBS, into which Credit Suisse has been merged, is to cut 35,000 jobs. Of those, only a limited number will be able to move to other banks.
Darren Burns, head of the London office of executive search firm Morgan McKinley, points out that "the financial industry hired more people last year due to structural reforms and good results, but less this year in response.
On the other hand, Burns says, "there are certainly people working in the highly regulated financial industry who want to venture into other industries with more entrepreneurial spirit."
If former Credit Suisse bankers become more competent in other industries than they were before, it could be good for Switzerland and its society as a whole in the long run.