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Department of Business and Economics

Mainichi Shimbun on Credit Suisse's demise and bankers' skills

In this article by the leading Japanese newspaper, Prof. Michael Böhm discusses talent in banking, and how market structure leads to overpay and hinders innovation in the sector.

"Sunday Column (Translated from the original Japanese)"

The treatment of former employees of Credit Swisse, which was rescued and merged into UBS, Switzerland's largest bank, is attracting attention.

UBS is expected to reveal details of the job cuts by the end of August, and some believe that more than 30,000 positions will be eliminated as a result of the merger.

Credit Suisse was once the symbol of Switzerland as a financial powerhouse. Where will its elite employees go?

“The image of bankers is not necessarily good for the public," said Claudine Esseiva of the Swiss Bank Staff Association', an organization of Swiss bank employees. The association is currently working to support bankers who leave the bank. However, she said, it is difficult to gain the public's sympathy.

In April, when I visited Zurich, the financial center where both banks are headquartered, I felt the cold eye of the public toward Credit Suisse. Many people, from experts to people walking the streets, criticized Credit Suisse's management stance.

For one thing, there was anger that the company had deviated from the solid Swiss financial tradition by emulating the U.S. and focusing on risky investments. One economist noted, "They were naive to think that even if they failed in their investments, the government would bail them out in the end because of the size of their own company”. Taxpayers will not understand if the company is willing to take a risky investment and reap huge profits if it succeeds, but ask the government to bail it out if it fails.

Stefan Legge of the Institute for Financial Research at the University of St. Gallen pointed out, "The managers of the giant banks should reflect on how much innovation and value the banks themselves have achieved”. The reason for this is the declining position of banks in the domestic economy compared to the pharmaceutical and chemical industries, which are the new engines of growth in Switzerland. Mr. Legge said, "There is a difference between generating profits and creating value”. Compared to the pharmaceutical and chemical industries, which develop new drugs and products, banks are less capable of creating value through new innovations. There is even a joke that "the only innovation that banks have created is the ATM (Automated Teller Machine).

German economist Michael Böhm and his colleagues published an interesting study on bankers last year. The study analyzed and compared the salary growth of bankers in the United States and Sweden between 1985 and 2017, countries for which data are relatively easy to obtain, with averages for all industries in each country. According to the study, bankers' salaries in both countries grew from 10% above the average of all industries to 60% above the average of all industries during this period.

The researchers compared bankers' intelligence quotients, bankers' high school grades, ability to work as a team, and leadership skills in 1985 and 2017 to see if the wage increases were due to improvements in bankers' skills. The results showed that bankers' skills themselves had not grown at all. When compared for the same type of work, bank secretaries and cleaners saw a significant increase in salary over secretaries and cleaners in other industries. Böhm concludes that "the growth in bank salaries during this period had nothing to do with an increase in skills”.

Why, then, did bankers' salaries rise? Böhm explains, "Besides deregulation, which has made them more profitable, more fundamentally, the world's wealth has increased, and the banks that handle it have earned more money”.

The study's findings remind us of an age-old criticism of banks. Banks attract the best people and pay them high-class salaries, but they may not be utilizing their skills to the fullest 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 to recognize growing investment opportunities. But even so, the criticism is that some people are not able to fully demonstrate their abilities within the confines of a bank.

Böhm argues that "finance is not a super innovative sector" citing a lack of competition as the cause. “The banking industry tends to be an oligopoly, and it is easier for regulators to regulate an oligopoly. While oligopolies allow individual banks to make large profits, they also inhibit technological innovation", he said.

Some also question whether newly developed financial products and technologies are really making the world a richer place. In their book "Good Economics for Hard Times," Abhijit Banerjee and Esther Duflo, Nobel laureates in economics, write, "Why should young people, who could be developing more socially beneficial products and services, be hired by banks to write software for high frequency trading (HFT)?”

UBS, which absorbed Credit Suisse, is said to be cutting 35,000 positions. Of these, only a limited number will be able to rejoin other banks.

Darren Burns, director of London operations for the human resources consulting firm Morgan McKinley, points out that "the financial industry expanded hiring last year due to structural reforms and good performance, but this year, in reaction to that, they are hiring less,".

On the other hand, Mr. Burns says, "There are certainly people working in the financial industry, which is heavily regulated, who want to venture out into other industries with a more entrepreneurial spirit”.

If former Credit Suisse bankers can become more competent in other industries than they were before, this could be good for Switzerland and its society as a whole in the long run.