Can we regulate the banks properly, or are they simply too large and too powerful?
HSBC is one of the world’s largest and most powerful financial institutions with offices on five continents, including in Australia. It likes to spruik its financial might and global reach. Behind the corporate gloss, it has a far less attractive reputation.
The bank has been at the centre of several of the biggest financial scandals uncovered this century. HSBC, or the Hong Kong & Shanghai banking Corporation has been implicated in a raft of illegal activities, from money laundering for the mafia, to enabling tax evasion and currency manipulation.
Despite these revelations, the bank has flourished, leaving investigators frustrated. The film raises disturbing questions about who is in charge of regulating the banks in an increasingly globalised financial world. Regulators stand accused of failing to adequately punish the bank and impose penalties that hold HSBC to account.
This story about the HSBC is of a piece with accounts of bank activity being outlined in our current bank enquiry but at a much higher level.
What we see in Australia’s Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is that the banking regulator (ASIC) has not regulated bank activities as one would hope. Also, there is a suggestion that when misdeeds are uncovered those responsible at higher levels leave the offending banks but are then likely to be rehired elsewhere. One wonders what if anything about the ways in which banks behave will change once the enquiry is over.
The culture underlying banking is itself an obstacle to reforming the banking industry: “If we educate our graduates in the inevitability of tooth-and-claw capitalism, it is hardly surprising that we end up with justifications for massive salary payments to people who take huge risks with other people’s money. If we teach that there is nothing else below the bottom line, then ideas about sustainability, diversity, responsibility and so on become mere decoration: https://www.theguardian.com/news/2018/apr/27/bulldoze-the-business-school “
The big question is whether or not we can regulate the banks properly (or are they simply too large and too powerful)?
What do you consider we need ‘more of’, and what do we need ‘less of’ to strengthen current policy, legislation and regulation?
How effective can legislation and policy be if one takes into account the current banking culture?
Banks exist to enable people, governments, and corporations, to safely store and reinvest their surplus money. They therefore provide debt that enables mortgages and the financing of industry. This worked reasonably well when banks were many and reasonably small. But today many banks are huge international operators. Many have more resources greater than many countries and can avoid national regulations including, the payment of taxes. Their power is reflected in the powerlessness of the four regulators in Australia, none of which seem to have effective teeth. Even the terms of reference for the recent Royal Commission do not venture into examining their effectiveness.
Banks in many ways reflect the worldviews of much of the population, including how economies need to operate. Growth is the only way to prosper and we expect high returns even from an industry that is low risk. So banks continue to look for ways to create growth, to fit with that worldview. Relying on their fear of developing a poor reputation no longer seems effective. It is easy to see that they are run with scant regard for any sincere values of corporate responsibility to the society, economy and Earth.
Moreover, regulation requires government action but it’s not clear that either major party is very motivated to act. Donations from the banks help to fund election campaigns. Too much interchange of people between politics and banking is also an issue.
If this is the case, one wonders how effective current legislation and policy is?
There is some pessimism about whether efforts to change banker behaviour by regulation (including fines, being banned) can succeed. The telling factor isn’t so much the understandable pain of the betrayed and the aggrieved. Rather, it is the long-term and ongoing silence of customers and stakeholders who tacitly accept the banks’ behaviours to secure the rewards accruing from those behaviours. That 782 companies trading in Australia earn collectively over $500 billion while paying no tax back to Australia’s commonwealth signals little or no moral conflict in such situations for a healthy portion of our commerce and industry and capital holders.
Based on experience of the last 30 years, campaigns to encourage consumers to switch from banks to retail co-operatives have not been successful because the capacity of the credit unions and building societies to compete on price is constrained by economies of scale that the Big Four have in buying money at cheaper rates and by regulatory barriers that currently prevent new players from offering products that are restricted to the Big Four.
What do you consider we need more of, and what do we need less of to strengthen current policy, legislation and regulation?
There are traces of a reaction against the banks triggered by the Royal Commission. This builds on wide dissatisfaction that the banks were bailed out after the global crisis whereas the bank’s victims were not. It would be good to see some action while the Royal Commission is fresh in people’s minds.
Prohibiting total vertical integration seems intuitively sensible as a broad-brush measure but an ideological move towards less regulation has not worked. The banks say that they are heavily regulated but not as much as they once were. On that basis, imposition of some further constraints seems likely to be worthwhile. Beyond that, serving the community seems to have become a quaint historical anachronism. We need to rehabilitate the concept and insist that it is embraced.
If more or cleverer regulation is required then one might agree that despite the humility and promises of bankers, a degree of coercion, legal and peer pressure seems necessary for a higher standard of alignment to ethical principles. This perhaps needs to be more targeted at the directors than the corporations.
More transparency about who contributes to what might further amplify influences. Enforced regulation would help but would take time. Heavy penalties for breaches would also help if the penalty was related to previous benefits gained by the breach.
Regulation needs to be enforced to break up monopolistic advantages so that market-driven competition can work. In turn, greater competition would progressively erode the hubris in the internal culture of the Big Four so that customers are not treated as fixtures to be gouged. It’s a circle: whether you begin with regulation or with a market competitor, you need the other to drive a competitive culture on both supply and demand sides.
In the longer-term one might aim to transform the current banking culture or vigorously promote alternatives to it. The broad question is, how does one move toward a different type of economy: To something that is more sustainable, doesn’t rely on growth as the main success indicator of success, and truly adds value to society.
For example, if Australian banking provided top rated financial services (from the perspective of integrity & financial viability) not only would Australia become a safe haven for scared investors world-wide but one could also more readily trust any financial advice or insurance services offered by the bank — or referred by the bank.
A campaign to encourage people to switch from the big banks to cooperatives might help. If the community, via cooperatives, could provide lower cost ways to provide loans using existing money then one source of bank’s profits would dry up. Lower cost loans would take away most of the business of banks. What would become important are places to invest money that give a return with more goods and services.
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