PAWEL WARGAN
The big banks seem to have come out of the financial meltdown relatively undamaged, if not stronger than ever. But could they have irretrievably lost an asset more precious than money, their consumers' trust, in the process?
'I don't trust my bank, do you?' - A Move Your Money UK activist outside a Barclays branch in London. Demotix/Maciek Musialek. All rights reserved.
Working to shed the no-holds-barred MO of Wall Street finance, Barclays promoted Antony Jenkins, former head of retail, to its Diamond post on August 30. Whether Jenkins's promise to engage stakeholders in dialogue revives trust in the British bank remains to be seen. But we must remember that Barclays is a small part of a wider crisis of confidence, the causes of which lie both with the banks and with the system in which they operate. Regulators must now work to equip themselves with the tools to bring accountability to the financial markets. Until they do, the markets will continue to suffer from an endemic shortage of trust.
Trust is linked in an important way to fiduciary responsibility. It embodies the relationship between company managers and their shareholders. This responsibility forms the bedrock on which corporate integrity rests. Among the breaches of fiduciary duty recognised in English law are: the use of corporate assets for personal gain and the failure by managers to enforce standards within their company. To a public that is increasingly distrustful of the financial services market, these breaches take on an air of familiarity.
In some ways, rightfully so. The prime movers of global finance have revealed, with shocking irreverence, a tendency for irresponsibility. The rabid pumping of the sub-prime mortgage markets caused one of the largest financial slowdowns in modern history. More recently, banks were found to have manipulated the London interbank offered rate (LIBOR), which is a key benchmark affecting interest rates on many financial products. Other examples abound, all against a backdrop of indulgent compensation packages.
We may not be able to, as a matter of law, link many of these actions to breaches of fiduciary duty. LIBOR, for one, does not directly influence prices, and the burden of proof needed to show that its manipulation has harmed the markets is steep (this has been discussed elsewhere). We may face an even greater evidential burden when seeking to establish criminal liability (see here).
But we are beyond discussing legal culpability. We are talking about restoring trust, which is integral to the calculus of the markets. Trust affects risk, a primary determinant of price, and no amount of lawsuits can restore balance to the equation that links fiduciary responsibility with the sound operation of the markets. Executives need to accept that management is a double edged sword—success can bring reward, but accountability must follow failure. The question is: can the markets independently impose this standard on the financial sector?
They could, but only in an undistorted competitive playing field. This seems elusive in the world of finance. Rapid economic growth, as seen in the run-up to the 2008 crisis, has yielded immense profit for banks and significant leverage for politicians. Little political oversight allowed financial institutions to ignore risk and collude in ways that distorted the normal operation of the market. In the post-crisis period, banks sponged up public rescue funds and continued their game of one-upmanship.
Deflating the standards of this race requires that banks recognise trust as a core part of their long-term strategy. The idea that compromising trust can endanger the survival of a company must be embedded in its business model. For this reason, perhaps, the primary perversion of financial competition comes not from within the market participants, but from the absence of effective regulation. Regulators expect the invisible hand of the market to engender banks with standards that extend beyond its vocabulary of supply and demand.
Regulators need to be able to investigate and punish wrongdoing. To do this, they need to be independent from politicians, who are easily lulled into complacency by positive growth trends in times of economic boom. The far-reaching effects of financial scandals suggest that country-specific regulation of financial markets is also insufficient. A consolidated global financial market requires an international regulatory body that can diagnose recklessness and punish anti-competitive behaviours. The European Union, having pioneered a transnational system of competition law, is a prime contender for such a legal innovation. But it lacks, at present, the political consensus needed to make such a regime viable.
The world's top banks and financial companies have, apparently without irony, been assigned the epithet "too-big-to-fail". The term is appropriate for one reason: the survival of these institutions is linked to the survival of the markets. In the absence of viable alternatives, regulators have shown a desperate willingness to apply public funds to refinancing financial institutions. Public exposure may now push regulators to reform LIBOR, but the distinctly laissez-faire approach to other areas of financial regulation will undoubtedly persist, cultivating the idea that finance is a necessary evil (or worse, that it is an unnecessary one). In this climate, not even the personable likes of Mr Jenkins will be trusted.
Working to shed the no-holds-barred MO of Wall Street finance, Barclays promoted Antony Jenkins, former head of retail, to its Diamond post on August 30. Whether Jenkins's promise to engage stakeholders in dialogue revives trust in the British bank remains to be seen. But we must remember that Barclays is a small part of a wider crisis of confidence, the causes of which lie both with the banks and with the system in which they operate. Regulators must now work to equip themselves with the tools to bring accountability to the financial markets. Until they do, the markets will continue to suffer from an endemic shortage of trust.
Trust is linked in an important way to fiduciary responsibility. It embodies the relationship between company managers and their shareholders. This responsibility forms the bedrock on which corporate integrity rests. Among the breaches of fiduciary duty recognised in English law are: the use of corporate assets for personal gain and the failure by managers to enforce standards within their company. To a public that is increasingly distrustful of the financial services market, these breaches take on an air of familiarity.
In some ways, rightfully so. The prime movers of global finance have revealed, with shocking irreverence, a tendency for irresponsibility. The rabid pumping of the sub-prime mortgage markets caused one of the largest financial slowdowns in modern history. More recently, banks were found to have manipulated the London interbank offered rate (LIBOR), which is a key benchmark affecting interest rates on many financial products. Other examples abound, all against a backdrop of indulgent compensation packages.
We may not be able to, as a matter of law, link many of these actions to breaches of fiduciary duty. LIBOR, for one, does not directly influence prices, and the burden of proof needed to show that its manipulation has harmed the markets is steep (this has been discussed elsewhere). We may face an even greater evidential burden when seeking to establish criminal liability (see here).
But we are beyond discussing legal culpability. We are talking about restoring trust, which is integral to the calculus of the markets. Trust affects risk, a primary determinant of price, and no amount of lawsuits can restore balance to the equation that links fiduciary responsibility with the sound operation of the markets. Executives need to accept that management is a double edged sword—success can bring reward, but accountability must follow failure. The question is: can the markets independently impose this standard on the financial sector?
They could, but only in an undistorted competitive playing field. This seems elusive in the world of finance. Rapid economic growth, as seen in the run-up to the 2008 crisis, has yielded immense profit for banks and significant leverage for politicians. Little political oversight allowed financial institutions to ignore risk and collude in ways that distorted the normal operation of the market. In the post-crisis period, banks sponged up public rescue funds and continued their game of one-upmanship.
Deflating the standards of this race requires that banks recognise trust as a core part of their long-term strategy. The idea that compromising trust can endanger the survival of a company must be embedded in its business model. For this reason, perhaps, the primary perversion of financial competition comes not from within the market participants, but from the absence of effective regulation. Regulators expect the invisible hand of the market to engender banks with standards that extend beyond its vocabulary of supply and demand.
Regulators need to be able to investigate and punish wrongdoing. To do this, they need to be independent from politicians, who are easily lulled into complacency by positive growth trends in times of economic boom. The far-reaching effects of financial scandals suggest that country-specific regulation of financial markets is also insufficient. A consolidated global financial market requires an international regulatory body that can diagnose recklessness and punish anti-competitive behaviours. The European Union, having pioneered a transnational system of competition law, is a prime contender for such a legal innovation. But it lacks, at present, the political consensus needed to make such a regime viable.
The world's top banks and financial companies have, apparently without irony, been assigned the epithet "too-big-to-fail". The term is appropriate for one reason: the survival of these institutions is linked to the survival of the markets. In the absence of viable alternatives, regulators have shown a desperate willingness to apply public funds to refinancing financial institutions. Public exposure may now push regulators to reform LIBOR, but the distinctly laissez-faire approach to other areas of financial regulation will undoubtedly persist, cultivating the idea that finance is a necessary evil (or worse, that it is an unnecessary one). In this climate, not even the personable likes of Mr Jenkins will be trusted.
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