AIB Mending the Cracks

“AIB is facing a period of majority state ownership. The trick is to change its dominant culture and craft a new bank that acts in the best interests of all its stakeholders” writes Bill Hobbs

How AIB’s newly appointed senior managers unwind its aggressive business model and build a safer bank is key to its future as an independent bank. It is facing a period of majority state ownership and could be forced to divest itself of its international business in return for billions in state aid.

By making credit available to people and business, who make effective use of it, banks are central to what makes modern consumer economies and wider society thrive. It’s why banks are special and why they are regulated as public interest bodies. Without careful and prudent bank managers keeping a weather eye out for risks, a boom to bust credit fuelled economic cycle happens, as it has here.
Good bank managers should act responsibly in the best interests of all stakeholders and not solely in the narrow shareholder interest. Banking goes badly wrong when its managers use their power and influence to manipulate banking assets for short term gain and reward. It goes spectacularly wrong if they trade off their banks’ “too big to fail” status and take excessive risks, gambling that Government will always step into bail them out.

Moral hazard is the term used to explain this phenomenon. Governments and regulators are supposed to police and protect society from moral hazard risk. Bank managers should be constrained by public policy and regulations that inhibit their ability to destroy money and consequently undermine economic and social well being.
Banks are not inanimate objects that exist in parallel with the real world. They are business organisations of groups of people who act and behave according to norms they establish to get work done. They are led by small groups of powerful influential executives whose personal interests are aligned with shareholder interests. Bad banking happens when senior executives act irrationally and myopically to maximise short term gain at the expense of long term viability.
There are or course many fine people working in Irish banking who truly believe in prudent management. But if the dominant senior managers behaviours and values encourage excessive risk taking and insist on blind loyalty then bad things happen. Bad banking happens when good people remain silent and are manipulated and at times intimidated into acting out the designs of senior executives and their overseer boards.
Much has been written of the need to change banking culture or “the way things are done around here”. But changing culture isn’t easy. It takes authentic leadership and effective management to turn large organisations of thousands of people around. Unwinding from excessive risk taking embedded in “the way things are done around here” cannot be accomplished overnight.
This is the task of AIB’s leadership, both of its board and senior management team. But the jury is out on whether this aggressive, profit maximising, banking leopard can truly change its spots. AIB has a rich history where its private interests have collided with the public interest, stemming from a time when its senior executives learned how to leverage off it’s “too big to fail” status. Twenty years ago AIB management’s foray into insurance almost ruined the Irish banking system. Government stepped in and bailed it out by taking over the Insurance Corporation of Ireland and in the process burned up the states foreign currency reserves to support the Irish banking system.
Today AIB’s insistence on its absolute right to trade without due regard for public interest is seen within its arrogant rejection of a dire need for state aid and in subsequent behaviour during the process of appointing an insider as its most senior employee. While Bank of Ireland experienced flak for its own internal appointment, it has not engaged in protracted altercation with Government. Perhaps we are seeing the contrast between Bank of Ireland’s long experience of carefully aligning its interests with the State and AIB’s mercantile banking culture with its ambition to become an international bank headquartered in Ireland.
All organisations have a positive core – something they do well that forms the basis for their success. When things go badly wrong as they have for AIB, learning how to move on is as important as acting it out. The danger is that that internal change becomes a negative force intimidating people to fit the designs of those who continue to be wedded to the way things were done in the past.
Should its managers use the same forceful aggressive style that gave rise to the way things were done, then AIB may not change its ways. The trick for AIB is to change its dominant culture and craft a new bank that acts in the best interests of all its stakeholders – and gets good credit flowing again. Unfortunately bank managers are not known for their leadership ability – they may be good managers but can be extremely poor leaders.