February 25 Mark Carney, incoming leader of Bank of England was quoted saying: ”Trust arrives on foot but leaves in a Ferrari”. In this article in the Telegraph, he says: “When bankers become detached from end-users, their only reward is money, which is generally insufficient to guide socially useful behaviour,”
Mark surely has a point and it all boils down to values and guidelines of the financial institutions; which have to be more aligned with the needs and challenges of its customers. The first question is why did it become the way it is? The second question is how it can be changed?
I had a very interesting discussion with Dr Adrian Atkinson at Human Factors International yesterday on this subject. Adrian has a long career as executive coach all over the world, in basically all industries and in many of the large corporations’ C-suites. He concludes that his experience is that the recruiting and promotion practices in banks drastically differs from those in the more competitive and transparent sectors, which usually are based on sustainable values and customer focus. Adrian claims this is seldom the case in the financial industry and that their promotion practices lack in proficiency. The central banks have therefore a great opportunity to lead through example and provide guidelines how bank leaderships are selected. Being a role model and implement measurable targets are the best ways to achieve change. Hiring leaders with “socially useful behaviour” is one necessity.
Another, maybe more profound, issue Mark and other central bank leaders should address is the fact that the core of the financial regulation – namely Basel III – demotes relationship banking, including keeping close ties between customers and banks, and credit assessment techniques based on tacit knowledge and social collateral. The Basel philosophy is quite the contrary, imposing arms’-length relations between banks and its customers, forcing technical automation of credit assessments based on figure crunching, including official ratings. The Basel regulation provides all ingredients to incentivize manipulation and an abstract, mathematical approach towards risk. This contradicts all empirical knowledge that risk management can’t be automated, and that it must involve manual assessment. Unfortunately this is what Basel regulation has wanted to avoid for the past 25 years. This has led to that the regulation inhibits banks to provide services in a client centric mode and that, for example, in 2009 a Norwegian local pension fund suddenly found it unknowingly had invested in toxic American mortgages (long way between investor and investee no doubt). The Basel framework forces banks to detach from the end-users. It would make much better sense to align the regulation to support global trade instead of, as today, artificially manipulate banks’ risk-taking.
Everyone expects the banks to improve ethical standards to achieve trust and credibility. For this to happen the society has to support it, and it must be up to the central banks to ensure it does.
Good intentions are useless without good efforts. Adapting the regulation and bank management appointments to sound practices are two of those necessary efforts.
Video presenting the philosophy behind the Basel Framework: