In 2011 it’s distressing to see yet another headline of bank brand failure, where a bank’s brand trust has been compromised. This time it’s an alleged “rogue” trader who rang up a staggering loss of $2.3 billion for UBS bank of Switzerland. If there’s one brand rule for banks it’s this: Run the bank as a brand, or run the bank to the ground. When brand principles don’t drive bank operating practices, the bank itself is at risk. (A later news update is here.)
Brands succeed when brand principles drive business operations
As I’ve noted previously, brands succeed when brand principles drive business operations. To my mind, the leading brand principle is simple: “The closer you look, the better we look.” This is especially true for banks, proverbial brands of integrity and trust. Traditionally banks have been stalwart brands of fiscal prudence: solid, reliable and properly cautious. They were brands we could bank on. What made bank brands work was the absolute integrity of bank operations. This was an integrity we could see, feel and trust, from our first step through the massive front doors to the guarded tellers and vaults within. In a bank nothing was left to chance. Bank practices and procedures included layers of sign-ins, sign-offs and sign-outs, double-checks from peers, scrutiny from higher-ups, and a general skeptical gaze.
At least that was the nominal rule until the massive brand failures of banks in the credit crisis and economic collapse of 2008-2010, well documented here. That was ostensibly a “lesson learned.” Bank brands are still recovering.
Brands are built from the inside out. And they die from the inside out.
Brands are built from the inside out. And they die from the inside out. Again, this is especially true for banks. Brands of trust are fragile creatures, even within granite walls and steel vaults. For the bank, brand values are key. They must be baked into every step of bank operations. Brand values are a systematic discipline. This can be challenge for investment banks with profit-focused trading desks like UBS—and others before it (e.g., the brand flame-out that was Barings)—but the bank really has no choice. Again, it’s either run the bank as a brand, or, ultimately, run it into the ground.
The UBS brand: on the outside looking in
From the reports cited it would appear that the UBS brand suffers from being a brand on the outside looking in, rather than a core driver of UBS operating principles and priorities. The rogue trading in question apparently went undetected for three years, way back to 2008.
Here are key quotes from the first article cited above on the UBS brand failure:
The incident raises questions about the bank’s management and risk policies at a time when it is trying to rebuild its operations and bolster its flagging client base. The case could also bolster the efforts of regulators who have been pushing in some countries to separate trading from private banking and other less risky businesses. …
“It’s a shock, a real negative surprise,” said Panagiotis Spiliopoulos, head of research at the private bank Vontobel in Zurich. “People thought that after the bank had been revamped following the 2008 crisis, it was set up in a way that could avoid this kind of event.”
Shares of UBS dropped more than 8 percent on Thursday, while the broader European banking sector was up.
“The question that will be posed is how could this happen given the fact that all banks have committed to reduce proprietary trading,” said Rainer Skierka, an analyst a Sarasin, another private Swiss bank, referring to the practice of firms trading with their own money. “The next question is how the supervisor’s line of control works.”
Brands mitigate risk—when they’re brands of operation
A key value of brands is that they mitigate risk–when they’re brands of operation. Brands mitigate risk by institutionalizing brand values throughout company policies and practices. Brand principles become operating principles, endorsed and enforced. The stronger the brand the less risk a company incurs. A disciplined and systematic brand culture takes root. The brand aims to mitigate risk because it knows that an operating brand breakdown, such as that at failed banks in 2008-2010, or at energy giant BP in the Gulf of Mexico (see here and here), may lead to catastrophe.
At banks the bottom line is trust
At UBS, and at all banks, the bottom line is trust. No trust, no business. UBS is widely known for its wealth management operations for high net worth individuals. Some of these individuals are worth more than $2 billion UBS just lost. The question now becomes whether doing business with UBS is worth the risk. That is a brand question UBS must answer.
END NOTE: Should investment banks get a brand pass?
One might argue that UBS is primarily an investment bank, and is therefore not a candidate for a prudent, risk-averse brand operation befitting a traditional retail bank, the kind that handles checking and savings accounts for everyday citizens. The investment bank culture, it might be argued, is a high-risk trading culture where big bets are made and big losses tolerated if bigger wins come in. In other words, the trading operation is a brand of risk rather than a brand of prudence. It’s a “casino” more than a “bank.”
Two key factors work against this argument. First, UBS management has tried to institute stricter operating controls following UBS’s near-fatal collapse in the credit meltdown of 2008–2009. Obviously, they need to do more. Second, the prevalence of an undisciplined trading culture argues that it be segregated from normal banking operations, with the latter fully insulated from the risks of big bets. Such “ring-fencing” proposals are now under government consideration.
If banks can’t manage their brands, regulators will
From the Financial Times: Suspect trades reinforce ringfencing argument
UBS’s maverick transactions have caused too little damage to strain the bank’s stability, though a $2bn write-off could trigger a third-quarter group loss. But the ease with which deluded or dishonest traders can evidently still dodge internal risk limits will reinforce distrust of an investment banking sector where bad legitimate bets are a far greater systemic problem.
Brands are systemic solutions. If banks can’t manage their brands and solve such problems for the social good, regulators undoubtedly will.