Banking
Sustainability of Banks

Workshop on the Financial Sustainability of Banks ... Professor Roger McCormick (London School of Economics)

Burgess COMMENTARY
I cannot really understand why the idea of 'sustainability' has become so popular. A couple of years back I attended a conference on 'sustainability in the extractive industries' at Columbia University ... an oxymoron if ever there was one! So now its 'sustainable banks'.

On April 17th, the President of Ireland made a speech at the European Parliament in which he deplored the lack of an intellectual dimension to addressing the issues that face Europe and the world as a whole, and I would agree with this sentiment.

At the present time science and technology are way more powerful than they were when I left college 50+ years ago. There are more educated youth around the world than at any time in history. So what's the problem? These ought to be indicators of a world that is heading into a wonderful, productive and prosperous future.

I argue that the problem is that policy makers and powerful decision makers have a fixation about the type of economy that Adam Smith described in his famous book published in 1776. My memory of that time was that the fasted thing on the planet was a horse ... and productivity was so poor that the world could not feed itself even though the population was small compared to now.

From my perspective, the banking system that we have today was designed to solve the money and banking problems of the 19th century. The industrial revolution created real wealth because it was built on top of very real improvements in productivity. The same can also be said for the agricultural revolution that preceded the industrial revolution. Land plus labor plus capital added up to prosperity ... increasing over time because of the increments in productivity.

Something went wrong in the 1930s ... badly wrong. Opinion is still divided about what actually ended the Great Depression since World War II happened.

Fast forward to around the 1970s and the world changed from a global shortage economy to a surplus economy with more labor available than was needed to produce what we needed. At the same time all sorts of new technology was increasing productivity even more than in the previous era.

Using the Adam Smith model for the economy, labor now started to get less, land and capital started to get more. To the extent that labor still wanted goodies and could not really afford them, capital stepped in with all sorts of credit instruments so that people could still buy, but without earning enough to pay for things.

40 odd years later ... the Adam Smith world is in a mess. Governments also wanted things they could not pay for ... so capital stepped in and gave them credit too.

Meanwhile half the world remains poor and hungry. They really do need things, but they cannot ever pay for them in the sort of economic framework that we have constructed over the past 200 years ... and because of productivity things will get worse using the current model rather than better. I think this is ridiculous.

If I was a hammer, I would look for a nail to solve the problem. But I am an engineer / economist turned accountant. I see the solution in better metrics. The terrible trio of (1) money profit for business; (2) stock prices for investors; and, (3) GDP growth for policy makers, pundits and politicians ensures that sooner or later society will fail. The first signs of failure are already evident ... but media and misinformation remains very powerful.

I see the need for metrics that are as powerful as money profit accounting, but embracing impact on people, place and planet as well as merely profit for investors and C-class executives. Investors should be able to engage not only with activities that produce money profit but also social valuadd in its broadest sense. This is starting to happen, but it is tiny compared to the huge power of old fashioned established for-profit only organizations. I call this system of metrics TrueValueMetrics.
Peter Burgess

Workshop on the Financial Sustainability of Banks

Start: Feb 6, 2013 6:00:00 PM End: Feb 6, 2013 7:30:00 PM

Location: UCL Faculty of Laws, Bentham House, Endsleigh Gardens, WC1H 0EG

Speaker: Professor Roger McCormick (London School of Economics)

Chair: Professor Emilios Avgouleas (University of Edinburgh)

About this event: A league table of Bad Banks might lead to improvements in the ethics of Banking, argued LSE’s Professor Roger McCormick at a UCL’s Centre for Ethics and Law event on Sustainable Banking. He drew on evidence to the Banking Standards Committee criticising the idea that what Banks needed were more lawyers and compliance staff. Doubting the efficacy of Codes of Conduct, he advocated a focus on steps that might genuinely influence banking conduct. If it is the case that codes and process measures can simply be worked round and recognising that basic values may be important it was necessary to find other techniques. Structures played a role: Professor McCormick pointed to the de-federalisation of Barclay as a positive sign that the Bank might be taking control of the compliance and ethics problems it faced, with reporting lines direct into the CEO.

But there was a profound need to realign the interests of boards who had often not been informed of illegalities and other problems in their Companies. One approach was to look for proxy indicators of poor culture and magnify attention on those. Interestingly, Banks Sustainability Reports do not, he emphasised, contain information on regulatory findings and fines in spite of guidance that they ought to. McCormick has been developing a tabular format for collating and simplifying the information into a league table to make the information more impactful. The information is collated by researchers including fines and the nature of any breach.

Professor Emilios Avgouleas of the University of Edinburgh applauded the initiative and warned against too superficial a reliance on the notion of cultural change. To understand what we meant by a sustainable bank we had to think about what the purposes of a bank were and how those purposes could best be served. Complexity and incentives meant that utility banking, hedging and speculation had merged into a melange of one purpose where gambling and outsmarting competitors had become more important than long term financial health. For Avgouleas incentives were the key; at the moment they encouraged manipulation and short termism. Steps like McCormick’s league table had potential, he thought but regulators needed to concentrate on incentives not culture. In particular, a naming and shaming approach would not prevent a serious financial sustainability event in the future.

With the seminar taking place on the day the Francis Report was published, a member of the audience posed the broader question: isn’t cultural failure a broader social phenomenon? And if so, where does that failure stem from? The audience member felt that was a failure of societal values. An interesting area of deliberation which the Centre is involved in encouraging dialogue, is what role if any law and regulation has to play in shaping such values.