International banking community confidence in handling future economic crises

Understanding how knowledge of debt, monetary policy, and geopolitical risks impact confidence in the international banking community could be a way for stakeholders to better manage their investments. The purpose of this study was to determine if the international banking community feels confident that it can sustain another global economic crisis, and specifically whether geopolitical awareness impacts that confidence level. Rational choice theory is used for this study’s theoretical framework and is combined with the principles of mission command to explain how members of the international banking community perceive and execute their role in the industry in the face of mounting risks. The research questions were: 1) Is the international banking community confident in its ability to handle another global economic crisis like the one experienced from 2007-2008? 2) Does geopolitical awareness have an impact on the confidence of the members of the international banking community regarding the sector's ability to handle another global economic crisis like the one experienced from 2007-2008? 3) Do changes in central bank monetary policy (i.e., going from quantitative easing to quantitative tightening) and the awareness of the rising debt levels around the world affect the confidence levels of the members of the international banking community on the sectors ability to handle another global economic crisis like the one seen from 2007-2008? The findings showed that the international banking community is confident in its ability to hand another economic crisis and that neither geopolitical awareness nor changes in central bank monetary policy or awareness of debt levels were significant factors in impacting confidence. More research is thus needed to understand what affects the industry’s confidence in itself; future research should focus on the role that central banks play in affecting confidence levels. Chapter 5: Implications, Recommendations, and Conclusions The purpose of this study was to determine whether the international banking community feels confident that it can maintain stability if faced with another global economic crisis. It sought explicitly to assess whether geopolitical awareness impacts that confidence level. It was believed that assessing the confidence levels of bankers at the four major international banks (J. P. Morgan Chase, Deutsche Bank, HSBC, and Bank of China) could help understand whether the sector can safely handle another global economic stress event.
The methodology was quantitative, and the research design was to survey members of the international banking community to assess the impact of different variables on confidence levels. Using my LinkedIn page was able to send 1000 emails to a randomized sample of employees at J. P. Morgan Chase, Deutsche Bank, HSBC, and Bank of China asking them to participate in a survey hosted on my SurveyMonkey page. A total of 641 participants took part in the study.

This study has presented findings based on the idea that confidence plays a significant role in how money is invested. Everything from bond markets to equities markets to precious metals and blockchain is impacted by confidence (Haitsma et al., 2016). Banks should, therefore, have some sense of confidence levels in case another financial and economic crisis occurs.
Results of the survey showed that Employees of Deutsche Bank were outliers among employees of the other three banks regarding confidence in the international banking system to withstand a crisis of similar proportions to that of 2008. There was no clear indication, however, of any symmetry among views of employees of any of the four banks regarding the impact of geopolitical developments or central banking intervention in the markets or the levels of debt in the world’s countries. The participants indicated in general that confidence was mainly based on the awareness that the international banking system was much better regulated today than a decade ago and that central banks were more prepared to intervene to keep the system stable. Limitations included the fact that data was self-reported, which has been found to lead in some cases to underreporting (Gemming et al., 2014).
This chapter discusses the implications of the findings provided in the previous chapter. It also provides recommendations for practice. Finally, it offers recommendations for future research as well as conclusions that can be drawn from the findings. Implications The implications of the findings suggest that the international banking community does not have a confidence problem; investing and making investments for others can be conducted without fear of what an economic crisis might do to the industry. The variables that might impact the industry’s belief in itself were not found to be significant. The role of the central banking is likely one that should be examined in more detail, as it appeared from follow-up interviews that this role was relevant. This section discusses the implications of the findings one question at a time.
RQ1.Is the international banking community confident in its ability to handle another global economic crisis like the one experienced from 2007-2008?
H0. There is no significant relationship between working in the banking community and confidence that the industry can handle another economic crisis.
H1. There is a significant relationship between working in the banking community and confidence that the industry can handle another economic crisis.
The null hypothesis was accepted, indicating that confidence issues are not a problem for the international banking community. Possible explanations for this lack of association could be that employees believed their employers had implemented the appropriate controls and policies in the wake of the 2008 crisis and that they were now better prepared to handle risk and volatility. Though this survey was conducted before the March 2020 market volatility related to the global spread of coronavirus, the rapid bounce-back of the market over a matter of weeks suggests that the employees of these firms were possibly justified in their confidence that their institutions would be able to handle any volatility with relative ease.
One caveat in this explanation, however, is the role of the central banks of the world in injecting liquidity into markets through a variety of different maneuvers, such as the purchasing of high yield junk bonds by the Federal Reserve and the outright purchasing of equities by the Bank of Japan. In response to the COVID 19 crisis, central banks injected 10 trillion+ USD into markets. The overwhelming response of replies was affirmative, with 90% of respondents (240 total) stating that, yes, their impressions that the central banks would step in to bring stability to the market place and thereby to the international finance industry was the source of their confidence, since the central banks had set a precedent for precisely that type of activity in their response to the 2008 economic crisis.

RQ2. Does geopolitical awareness have an impact on the confidence of the members of the international banking community regarding the sector's ability to handle another global economic crisis like the one experienced from 2007-2008?
H0. There is no significant relationship between geopolitical awareness and confidence that the industry can handle another economic crisis.
H1. There is a significant relationship between geopolitical awareness and confidence that the industry can handle another economic crisis.
Again, the null hypothesis was accepted as the findings showed conclusive evidence of a significant relationship between the variables. However, for at least half of employees at JP Morgan-Chase, HSBC, and Bank of China, geopolitical awareness was positively correlated with confidence because these employees felt that by understanding geopolitical issues, their bank was better situated to provide expert advice and guidance for their clients. For three-fourths of employees at Deutsche Bank, awareness of geopolitics did not inspire confidence but rather fear and dread. One explanation for this could be that these employees did not trust their firm to be able to navigate the fallout of geopolitical tension and conflict. 
The key insight from this finding is that the firm’s reputation can impact employee perceptions of how to interpret geopolitical risk. If a firm’s reputation is strong, employees are more likely to consider geopolitical awareness in terms of how they can use to benefit clients and their firms and thus themselves. If a firm’s reputation is weak, employees are more likely to fear the fallout of geopolitical conflict and how it might impact their firm negatively and, thus, in turn, impact their careers. This suggests that banks that lack internal strength or that are plagued by an exodus of shareholders as Deutsche Bank has been in the past are less likely to have employees who believe that geopolitical awareness is something that they can use in their favor to assist clients. Instead, they view any type of global tension or conflict as inherently risky and harmful for the industry because they fear the impact it could have on weak firms like their own. Employees who view their firms as strong, on the other hand, will use geopolitical awareness with confidence because they are not worried that their own company may be adversely impacted by global conflict, and for that reason, they are more inclined to embrace geopolitical risk or turmoil and use that understanding to help clients make the right investments or take out the right loans at the right time. Nearly half of all employees participating in the survey felt that geopolitical awareness gave them more confidence, not less, and almost three-fourths of all employees felt that at the very least, it had no negative impact on their confidence levels regarding the industry as a whole, as Table 3 shows.

RQ3. Do changes in central bank monetary policy (i.e., going from quantitative easing to quantitative tightening) and the awareness of the rising debt levels around the world affect the confidence levels of the members of the international banking community on the sectors ability to handle another global economic crisis like the one seen from 2007-2008?
H0. There is no significant relationship between awareness of monetary policy and debt levels and confidence that the industry can handle another economic crisis.
H1. There is a significant relationship between awareness of monetary policy and debt levelsand confidence that the industry can handle another economic crisis
Once more the null hypothesis was accepted. The implications of this finding suggest that monetary policy and debt levels are not serious concerns for the international banking industry. One possible explanation for this could be that moral hazard has become institutionalized and normalized thanks to unprecedented interventions from central banks the world over. So long as the industry believes central banks will be there to support markets in times of volatility and stress, debt is not seen as a problem. The recent relaxation of the Volcker rule suggests that the Federal Reserve is more interested in a market that is liquid than a market that is modestly adherent to any type of constraints. Monetary policy is viewed as a normal function and response to market stress.
With respect to the findings, Sen’s (1977) “rational fools” thesis provides the best explanation for the findings. However, this thesis only makes sense if the international banking sector can be characterized in terms of a free market system, where rational choice and mission command still matter. If the global economy has, on the other hand, adopted more characteristics of a command economy where central banking intervention is relied upon routinely and regularly to keep market investments stable, it should not be surprising to find that bankers are insensitive to geopolitical threats or risks, to rising debt levels, or to fear in general. Unless employees have been directly or personally affected by destabilization and job cutting—like at Deutsche Bank in recent years—it makes sense that confidence levels are high: the nature of the modern global economy warrants it. The system itself has transitioned and changed from the 1970s when Sen’s rational fools theory was posited. It had more characteristics of a free market, where price discovery was generally conducted by investors over time. Today’s markets are characterized more by central banking intervention, large injections of liquidity from central banks, and one-direction movements in market in what is now the longest bull market in history.
In this climate it is not therefore surprising to find that of employees of the big four banks, those of Deutsche were most sensitive to risk: Deutsche Bank itself has come under substantial pressure in recent years and its falling stock price reflects that stress. This could explain some of the more pessimistic outlooks of the participating employees from that bank.
Based upon the responses of the banking employees overall, there is no indication of a statistically significant lack of confidence that the banking sector is prepared to handle a stress event like that of 2008. One possible explanation for this is that the majority of the employees expect central banks to intervene to stabilize markets if there is any meaningful decline. If judging from recent history gives any indication, this confidence is likely well-founded and not irrational. Recommendations for Practice Confidence among most employees of the international banking sector does not appear to be impacted by geopolitical awareness, leveraged accounts and rising debt. Though these variables were of some concern to some of the participants surveyed, the overall data suggested that there was no significant correlation between them and confidence. There is thus a need to better understand what might alter confidence among members of the international banking community. Overall, trust appears to be based on central bank interventionism. However, this level of confidence does not necessarily reflect a lack of risk in markets. With central bank interventionism comes higher asset prices as liquidity injections fuel asset purchases. One can see from the price of gold at the start of 2020 following Federal Reserve Repo Market interventions that bankers cannot be oblivious to the impact of prices that liquidity injections have. 
Recommendations for managers are, therefore, that they consider the risk of overconfidence as they plan their interactions with customers and clients, engage in portfolio management, or develop sales strategies. The employees themselves may not necessarily feel fear at this time—but the lack of fear may itself be an indication that overconfidence is developing and that as showed this could be a red flag of caution in and of itself—a harbinger of rising risk within the systemPikulina et al. (2017). Though the employees of Deutsche Bank were seen as outliers among the other respondents, the fact that Deutsche Bank itself has experienced increased pressure suggests that the risks are real and rising.
Managers within the international banking industry should consider developing risk management strategies that specifically address the issue of overconfidence among employees in the industry. Employees in sales, analysis, lending and investments made up the bulk of participants in this study and each of these departments has a considerable impact on the overall success of the bank they represent. If overconfidence among them is consistently evident, as appears to be the case in this study, it indicates that there is a lack of prudential thinking being implemented from a mission command point of view. Rational choice theory might indicate that in a command economy such as like that which is characterized by today’s central banks managing markets there is no real reason for bank employees to fear stressors since the central banks are ready to address systemic stress through liquidity injections. The problem with this is that liquidity injections can lead to unintended consequences (Crosignani, Faria-e-Castro & Fonseca, 2019). There is nonetheless a need to understand if employees actually understand the risks and unintended consequences of relying too heavily on central bank interventionism for market stability. Managers should explore the options available to them for assessing risk within their departments based on overconfidence and develop risk-mitigation strategies accordingly. Recommendations for Future Research Based on the framework, findings, and implications, future researchers might want to focus on the role that managers can play in reducing risks, making better rational choices in managing departments, and developing metrics to assess whether employees are lacking confidence or exhibiting overconfidence and what the outcomes could be in either case. 

Framework Risk needs to be considered more carefully because the environment in which banks are now operating has changed substantially since a decade ago. Quantitative easing is now the norm and the expectation among banking employees—yet there may be too little understanding of what liquidity injections actually do long-term to asset values, how they impact lending strategies, investment models, and sales. Future research can use the findings of this study to begin exploring whether confidence or overconfidence in central banking interventionism is a risk that managers should consider.
Rational decision making is another issue that should be explored further. Considering the limitations of this study, the extent to which rational choice can explain the outlook of employees in sales, investments, lending, and analysis all needs to be examined more closely. The study only partly examined the relationship between workers in the banking industry and outlooks based on the variables of confidence, geopolitical awareness, debt understanding and QE. An assessment of the actual individual departments and their managers could provide added benefit in terms of how confidence is interpreted, used, and potentially guarded against. Findings The findings did not support the acceptance of the hypotheses. The lack of statistically significant relationships among the variables suggests that other relationships still may exist that need to be better understood in order for the international banking community to manage risk most effectively. Research is also therefore needed in terms of assessing how under or over-confidence is assessed by managers in various departments. The next logical step in this line of research is to identify evidence for a strategy for elevating risk awareness within the industry and leveraging confidence as an indicator not only for managerial decisions but also for an effective reduction of risk.