It has been five years since the collapse of Lehman Bank, a time where there was much apocalyptic talk of the fall of the capitalist system. Slightly premature, and possibly an immature response to the crisis, capitalism – however one wishes to define it – staggers on, albeit with much of Europe in the grips of recession, Chinese growth slowing down, and the potential rise of interest rates in the US.
The blame in those gloomy, damn there goes another financial institution, days was put onto the doorsteps of bankers, whose excessive risk taking and hubris led to a financial earthquake. Governments, and their regulatory organs, fell into a jittery state. Their job was to supervise and protect, yet they failed. They failed. Like a wounded lion, weakened and battered, they licked their wounds but soon realised they were the king of the financial jungle. And then they began to roar.
A host of laws and regulations followed in the US, UK and wider Europe. Basel III, with its much more stringent controls on capital requirements, was passed in 2010 to rein in bank excessiveness. (although many blame these rules for prolonging the crisis). Government commissioned investigations into the ‘why’ of the crisis brought out uncomfortable truths on the practices of banks. The recommendations gave banks the sweats: Separation of retail and investment banking, ring fencing capital, capping bonuses – banks were aghast. Now they were the hunted and CEOs began to see their p45s. Once praised for the way they steered banks well into the green, people like Barclays CEO Bob Diamond became the bogeymen for presiding over dubious practices.
Regulators became the new rock stars. If the financial markets could be compared to the movies, the actors (banks) could no longer strut around Hollywood Boulevard with immunity. Their lustre had waned. But as with all of tinseltown’s dazzling lights, it would take death to knock them off their perch. Even with regulatory red tape, bank lobbying has ensured that most rules and regulations imposed upon them could be twisted or avoided. John Vickers, author of the Vickers Report on banks, commented that more of the bank’s capital has to be safeguarded in order to protect them in event of crisis. Banks scoffed.
Principally, regulation assumes a desired behaviour can be induced by adding red tape. Individuals and businesses have the potential of going beyond acceptable behaviour as accepted by general society, and they need to be restrained. This is because inherent human behaviour can be so egregious as to have an adverse effect on society. Regulators are concerned with the overall state of the markets, (hopefully) anticipating both the needs of the supplier and consumer. Often times the needs of the two can be at loggerheads, as the former party is concerned with higher profits, while the latter is concerned with lower prices. Even utility companies, the provider of basic necessities can be greedy. OFWAT has recently condemned water companies for overcharging.
The preferable solution is for the supplier of goods and services to protect oneself, i.e. if it has consideration of the needs of the consumer and non-consumer. Suppliers need to make profits, certainly, as this is the lifeblood that keeps them going. Therefore they need to charge a price that at the very least is an increment into consumer surplus.
Yet perhaps for banks, expectation for them to consider wider society and how their actions could have wider repercussions is unwarranted. At the end of the day their bottom line is to earn profits. If a banker can make money for the banks – and that could be a lot of money – then they too will significantly benefit financially. As with most companies today, they sit behind computer screens in open plan rooms reading the FT about finance, talking to colleagues about good bars, calling clients about accounts and clicking mouse buttons to increase the values of the numbers on the screen. It is all about money.
The education system, with its standardized grading system which creates a hierarchy of good students and bad students, is tailored precisely to ensure children who work, can earn more, and live a financially stable life. Better grades = better universities = better jobs. It is why Forbes magazine can suggest brazenly that as universities are losing money, they should become like a business, and t lose the degrees that do not add (monetary) value. Many legal schools today are concerned with corporate and commercial law. In the UK the downsizing of legal aid has meant entering criminal law is a financial death knell.
Financial management is important, and concentrating resources in areas which add value by increasing profits is logical especially as sustenance of any individual or company means building up surplus income. After sustainability has been achieved, the next step is expenditure. So if individuals have financial aggrandizement in their mind, then with or without regulation, their bottom line is increasing income. They may invest, purchase real estate, or take high risk gambles to secure greater remuneration.
The basic human urge is firstly financial security and then establishing a luxurious life. No one wants to struggle. This is fundamental human psychology for the majority of humanity. In banks, achieving the latter is more than possible. The system encourages it, even if it occasionally means circumventing acceptable practices. So for regulators, their rules are to harness this psychology, control it to ensure the wider impact is not adverse. The challenge, however, is that if the education system encourages the quest for money, if the workplace environment pushes its workers to work harder for more profit to disburse to the workers to live the good life, then behaviour is always going to be individualistic with a narrow concern for health of loved ones and company. Who cares about the stranger on the street when one has to live for oneself?
Humans are not all avaricious and heartless as I have suggested. The point only to be made is that neither are banks philanthropists. Their workers are there to make money. Sometimes, by any means necessary. Controlling that behaviour is then a very difficult endeavour.