To improve banking standards, bankers themselves must choose ethics over short-term profit
Norman Chan says while a sound regulatory regime is important, the best safeguard against yet another financial meltdown is for bankers themselves to choose to behave ethically
I was really encouraged by the implicit acceptance, in putting the thorny subject of ethical behaviour on the agenda of a banker's summit, that it is primarily for the banking industry to seek to regain the moral and ethical high ground it once enjoyed. This is not something which can, or should, be regarded as a "policing" or "enforcement" matter for the regulator. Getting caught out, taking the fine as a "cost of doing business" and moving on with making money is just not acceptable as a sustainable banking business model.
I do not subscribe to the view that banks' primary role is to generate maximum shareholder value, leaving the regulator to worry about the safety of deposits and the interests of the banks' customers. Having a licence or franchise to take deposits, which represent the hard-earned savings of millions of people, and use these funds for private gain is a privilege conferred by society on a bank, which merits exemplary professional and ethical behaviour.
The theme of the summit is "Regaining the moral and ethical high ground". What do we really mean here? I think, in a word: trust. With trust, comes respect.
In the past, banking was regarded as a reputable profession and bankers were highly trusted and respected. They no longer enjoy the same high degree of trust and respect from society, especially after the global financial crisis. What has changed so dramatically?
Well, the modality and governance structure of banking have changed a great deal over the last century. More importantly, these changes have created an incentive system that leads to a misalignment and disconnect between the interests of the owners of banks (that is, the shareholders), bank management and customers.
Not so very long ago, banking was a business conducted by individuals, families and (more latterly) private partnerships, where the owners and managers had ample "skin in the game". They stood to lose not only their investments but also their family wealth should their actions, or the actions of their partners, result in failure of their bank. This naturally served to temper the degree of exuberant risk-taking. This "alignment of interest" between bank owners or managers and customers and creditors clearly helped promote trust.