City culture won't change easily
29 Jun 09
Simply calling for a better attitude on the part of bankers and market traders won’t be enough to make the system safer
by Robert Outram
Chancellor Alistair Darling last month told the City, in his annual speech at the Mansion House, that banks need a “change in culture”.
He said: “Their focus must be long-term wealth creation, not short-term profits.”
Warm words, however sincerely meant, are not going to change the nature of a financial system that has caused such chaos.
There’s a growing sense that the immediate crisis is, if not over, at least coming under some kind of control. The billions of pounds, dollars and euros pumped into the world economy seem to be having some effect. For many out there in the so-called “real economy”, however, the tough times are just beginning.
In his book on the crisis, The Storm, Liberal Democrat finance spokesman Vincent Cable, writes: “The immediate priority is to protect the system from meltdown. But there has to be some link between short-term fixes and long-term structures. There is a real risk that governments will put taxpayers’ money into the banking system without banks, or the public, having any clear sense of where long-term policy is heading and, in particular, what kind of banking industry should and will emerge. Clarity over the reform agenda is therefore urgently needed.”
We are now at the point where a degree of consensus seems to be emerging on the reform agenda, at least among governments and the banking sector.
We can safely predict that there will be a much greater focus by regulators on systemic risk – to the financial markets and the economy as a whole, rather than just focusing on individual institutions.
Liquidity, and not just capital adequacy, will become an important measure of a bank’s stability, and there will be more transparency. Financial reporting will be subject to new standards.
While it is very unlikely that national regulators will give up their sovereignty to international bodies – this was made clear by Darling in his Mansion House speech – there will be more cross-border co-ordination and communication between regulators. This recognises the fact that the financial system itself is international.
There will be a nod to the widespread anger over bankers’ bonuses, but any restrictions are unlikely to be too draconian.
Finally, there is a growing acceptance that “the financial system” is wider than “the banking system”. Managing systemic risk must take into account the hedge and other funds, and the off-balance sheet vehicles that played such a large part in bringing about the present crisis.
In its report in May, the UK Parliament’s Treasury select committee said: “Bankers have made an astonishing mess of the financial system. However, this was a failure not only within individual banks but also of the supervisory system...”
That might imply radical reform in banking regulation. Actually, all the signals are that reform will be much more modest.
The phenomenon of boom and bust was not caused simply by a faulty culture in the banking industry. Its roots are in the structure of a market system that makes short-term profit an imperative.
Simply appealing for a change in “culture” is rather like saying to your teenage son: “I was very, very disappointed when you crashed my sports car. You could have got yourself killed and you wrecked a very valuable car. I hope you’ve learned your lesson and won’t do it again. And here, by the way, are the keys to your new Ferrari…”
ROBERT OUTRAM, EDITOR
rob@connectcommunications.co.uk
Read my blog at www.camagonline.co.uk