This week the Bank of East Asia, a family-owned bank in Hong Kong, sold almost $1 billion of shares to one of its big shareholders, Japan’s Sumitomo Mitsui Banking Corp. The reason, probably, is to shore up the family’s control of the bank. But is that a good thing?
BEA was founded by the grandfather of the current CEO, David Li, in 1918 and is one of only two remaining family-owned banks in Hong Kong. The other is the Dah Sing Bank, which has been the subject of takeover rumours. Another, Chong Hing Bank, sold a majority stake to Chinese conglomerate Yuexiu Enterprises for $1.5 billion in 2013.
The Li family seems pretty keen to keep hold of the bank and has said it will only sell for a large premium. However, pressure has been put on them by American hedge fund Elliott Management, which recently became a sizeable shareholder.
Elliott - often called a vulture fund - is perhaps best-known for its long-running feud with Argentina over some bonds that it defaulted on in 2002, but which it subsequently bought. Elliott is pursuing a court case in Hong Kong over the Sumitomo Mitsui deal, which has diluted their share in BEA and strengthened shareholders loyal to the Lis.
Elliott might be hard to love, but the episode raises an interesting question: are family-owned banks a good thing? They are often opaque, operate using contacts and connections and local knowledge, and they sometimes act to protect their own interests rather than shareholders’. In short, they are not economically rational or transparent.
There is a strong argument that this is a problem. Post-2008 we all understand just how important transparent, above-board banking is to the global financial system. So should family banks be forced to change their ways? The secrecy that comes with family ownership might be grudgingly tolerated in other industries, but is it acceptable in banking?
There are plenty of good and - seemingly - strong family-owned banks. Swiss banks like Lombard Odier and Pictet & Cie, British bank Hoare & Co and Banca March, which shocked European bankers by topping the ECB’s stress tests in 2011, are great examples. The mission statement of America’s First Citizen Bank, controlled by the Holding family, includes the arresting line: “We intend to be in business indefinitely”, which is encouraging.
On the other hand, others are not so great. Barings, the 233-year-old bank that was destroyed by rogue trader Nick Leeson in 1995, was family owned and was criticised for its shoddy management oversight. BEA had to re-state its earnings downwards by 12% in 2008 after its own a rogue trading scandal. And recently a Chicago court found that when the Mutual Bank of Harvey, a Chicago bank, collapsed in 2009 the Veluchamy family which owned it had become embroiled in a scheme to squirrel away assets to India.
How much of this is connected to their being family-owned is open to question, but there is a prima facie case that family ownership is just too risky for a bank.
That might have more force, however, if listed banks such as JP Morgan, Wells Fargo, Bank of America, HSBC, BNP Paribas and Credit Suisse had not paid fines of well over $100 billion for manipulating Libor and the forex markets, money-laundering for drug cartels, aiding tax evasion and sanctions-busting in recent years.
The proper way to control banks is to ensure they obey the rules and have enough capital to deal with problems if they arise. The family model might not be ideal and hedge funds might tut at the tactics their owners use to keep control, but the alternative is hardly compelling.