Markets rise and fall. Recessions come and go. But when it comes to the reputational challenge caused by bankers acting badly, not a lot seems to change from one year to the next.
Thanks to a huge cache of leaked secret files, the world is just now learning the extent to which HSBC’s Swiss banking arm advised wealthy clients on how to conceal millions and circumvent domestic tax authorities. Last year, following a rigorous investigation, we saw some major global financial institutions fined a total of US$4.3 billion for failing to stop the manipulation of a foreign exchange market benchmark used to value assets globally. The U.S. Department of Justice is about to weigh in on this one, with criminal charges for some of these institutions (and potentially individuals) rumoured to be in the offing.
Looking back over my 30-plus-year career, I can recall far too many cases of financial mad cow disease resulting from a range of judgment lapses, woeful product designs and a seemingly insatiable appetite for excessive leverage. Think about the savings and loan scandal from the 1970s and 1980s. Think about the conflicts of interest that existed between research departments and investment banking units in the 1990s. Think about Enron and WorldCom and the shockingly poor risk management at Long-Term Capital Management, Bear Stearns and Lehman Brothers. Think of the crimes committed by Bernard Madoff and Allen Stanford.
The combined price of these debacles alone has been estimated at over US$180 billion, and that’s not including costs incurred by the industry related to Sarbanes–Oxley and other regulatory actions.
The ultimate result of this sad state of industry standards, of course, was the 2008 global financial crisis, the impact of which has been estimated at five per cent of global GDP (over a couple of years) or $7.5 trillion. If you add up all the economic costs and fines related to shameful industry actions that have occurred in recent memory, the number approaches US$8 trillion, about the GDP of China, not to mention about US$1,100 for every man, woman and child on the planet. That may not shock everyone on Bay or Wall Streets, but to someone on Main Street, let alone in the developing world, the numbers are scary large.
It is important to note that banking is dominated by decent people who contribute significantly to society. But there is no question that the world would have been better off over these past 30 years without the cumulative impact of fraud, excessive risk taking, poor judgment and underfunded regulation. And the number of players involved in the industry’s scandals is almost moot since everyone in the financial sector is affected. Indeed, even with cases of criminal acts and poor judgment limited to a select few, the whole industry ultimately pays the price in reputational damage and the related reaction from regulatory bodies.
When will this reputational train wreck end? In my opinion, it will take tangible cultural change within our industry before anyone feels confident that the bad genie is back in the bottle. But I also believe this can be achieved through a focus on five key themes:
First, we need to realize the importance of our actions. Our responsibilities as leaders within the industry — which is the lifeblood of both the global economy and society — cannot be misunderstood. Doctors have the Hippocratic Oath. Lawyers have the Bar. Corporate boards have standards set by the Institute of Corporate Directors. Portfolio managers have the Chartered Financial Analyst designation. But bankers have nothing but their word. And that just isn’t enough anymore.
Some financial institutions have formalized expectations of values and standards. But it is time for the banking industry to consider a common values-based standard, perhaps even one with a revocable license to practice. After all, personal and corporate integrity inherent in the industry’s products and services must trump quarterly earnings releases — not just occasionally, but always.
Second, consistency and a demand for high standards across all asset classes or markets must be the bare minimum expectations. To do this, banking leaders and regulators should seriously question more industry practices to ensure that they deliver the standards of fairness, transparency, accountability and trust needed for successful markets.
LIBOR setting, high-frequency trading and questionable foreign exchange trading practices are flawed in this regard. And while they have been called out as problem areas to varying degrees by outsiders, we need people on the desks to speak up, and we need their team leaders to watch, listen and act. We cannot simply rely on regulators; we must self-regulate with purpose.
Third, we need to remember that larger forces continually shape our industry. The speed at which markets assess and adjust during business cycles is the new norm. Volatility is inevitable. Remember the 1983 Latin American debt crisis or the October 1987 equity market meltdown or the 1997 Asian financial crisis? The world economy will see more of these events and bankers must help more to contain the contagion. This is critical.
Regulators can help address the risk of contagion, but a vigilant commitment by bankers to transparency, risk management, appropriate liquidity and capitalization will minimize the impacts of volatility and ensure that consistent levels of service are maintained in all kinds of market environments.
Fourth, while we must be transparent about the industry’s challenges, we must also highlight its successes. According to research by BMO analyst Sohrab Movahedi, the global banking industry’s market capitalization increased by US$5 trillion between 1983 and 2013. During this period in North America, the average annual return of the banking industry was 15 per cent, compared to the total market return of 12.5 per cent.
Could it have been better? You bet. But let’s not forget the wealth effect multiplier through added values to retirement funds and industry employment growth. And much good has also been done when you consider the direct impact of the industry’s numerous philanthropic initiatives which have helped so many communities — a responsibility readily accepted by the industry.
Finally, everyone needs to remember the good advice of our parents and apply it to our industry: Make sure you leave it better than when you found it. This is a measure that all financial industry professionals should use in evaluating their careers.
Banking continues to be a very good industry, one in which I am very proud to work along with thousands of others. But to let the good flourish, we need to work together on the above initiatives. We need to collectively earn (or re-earn) trust in order to better serve our customers and attract the finest minds possible to work with us. If we do that, we can read more about the good that our industry does and less about the scandals that make us all look bad.
