An argument against returning to business as usual in banking
In the shadow of the failure in Copenhagen to achieve consensus on climate change action, Davos saw a similar failure on the part of bankers, central bankers and politicians to agree how banks should be regulated in the aftermath of the global financial crisis.
One thing the participants could agree on at the World Economic Forum, however, was the erosion of trust being felt by bankers around the world, in an industry where trust has been historically assumed.
The GFC and economic interdependencies of globalisation have forced a rethink about the purpose and business models of financial institutions says World Economic Forum founder Klaus Schwab in the Davos report: The Future of the Global Financial System.
Trust in banks has taken a major hit, declining by up to 40 per cent around the world since 2007, according to the 2010 Edelman Trust Barometer.
The problem is, as the economy has started to rebound, bankers seem to have taken it as a prompt to return to business as usual. “It seems as if the sense of urgency for change among bankers and politicians has somewhat diminished lately, now that we see the first signs of recovery” said Nout Wellink, chairman of the Basel Committee on Banking Supervision in a speech last week.
The Davos report calls for more action, arguing the current period of profitability enjoyed by many financial institutions should not be mistaken for a final return to normalcy.
Economic cycles mean there will inevitably be another downturn. At question is what has been learnt from this one, and how those lessons will be applied to improve the industry.
More regulation is inevitable. The industry won’t like it, but it’s been dealing with increased regulation for years, and in the case of Australia, that regulation has paid dividends through the crisis.
But Wellink reminds us of one very important fact in his speech: You can’t supervise everything.
“We have to realise that more supervision and rules also creates a moral hazard problem, because we take away the incentive for institutions and clients to take their own responsibility and use common sense when engaging in financial products” says Wellink.
The Davos report argues the industry also needs to take responsibility for delivering more value to its customers and creating improved transparency of processes.
By and large the public still understands the purpose of a bank is to make money and deliver returns to shareholders, but the days of easy profits are over and today it’s value, transparency and accountability that people are seeking.
The Edelman Trust Barometer reveals transparent and honest practices now head up the list of factors contributing to corporate reputation, overtaking high quality products and services. More frequent communication is also highly rated.
So the next time you’re developing a new product, tinkering with processes, or devising your next strategy, ask yourself: How will this add value to the customer, is what we’re doing transparent, and is it responsible?
Tags: Davos report, financial regulation, financial risk, financial system, future of financial system, trust
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