Not all banks are alike
By Edward Hadas
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Competition is fierce for the Bankers’ Bad Behaviour Award. Rate-rigging, client-fleecing, dishonest documentation, reckless trading and exorbitant pay were all widespread before the 2008 financial crisis, and faulty practices have proven remarkably persistent. It sounds like there is something wrong with all banks. The ethical problem, though, is not universal.
Many of today’s lenders do have deep and disconcerting similarities. Their culture has been shaped by a faulty ideology, the cult of the market. They believe that society gains from fierce competition among firms which aim only at maximising returns for shareholders. Leaders of such enterprises only pretend to care about the future for marketing purposes and think they have no ethical responsibilities beyond obeying the letter of the law.
Business people often profess belief in this creed, but in practice they typically rely far more on cooperation than on competition. They work in organisations which are mostly meritocratic bureaucracies that aim to minimise internal strife. Regulations and common standards limit the scope and intensity of fights for business with other organisations.
Banking used to be much like other industries; competition played a relatively minor role. Most banks’ prime goal was the provision of mutual financial aid for a fairly narrow group of people: local businessmen or farmers, church members, labour unions or residents of a neighbourhood or region.
These socially oriented banks often engaged in what would now be called industrial policy. They supported promising industries and encouraged governments to do the same. The managers and directors often constituted a business elite which joined together to support non-bank causes that they considered worthy, such as education and urban development.
The single purpose of financing helpful investments was served by different legal structures. Some banks were owned by shareholders and aimed to be mildly profitable. Others had some sort of mutual control. Governments, both regional and national, were often involved. In the United States, the law favoured small banks, and government-controlled institutions helped finance housing and farming.
Some governments set up banks which aimed specifically at providing financing for long-term and risky projects. The first such development bank was the French Caisse de Depots et Consignations, which got into the business in 1822. The German Kreditanstalt für Wiederaufbau (now KfW) started in 1948 and the predecessor of the European Union established the European Investment Bank (EIB) a decade later.
Over time, many socially oriented banks decayed, as institutions of all sorts tend to. Change was needed. It came in the banking revolution which started in the 1980s, in the form of a triumph of market ideology. Institutional restraints were removed, practices which were not clearly profitable were abandoned, and greed was encouraged. Around Europe and the United States, most banks became simply commercial and most commercial banks all but abandoned any lingering sense of social responsibility. Investment banks became houses of speculation.
The changes were mostly in the wrong direction. Profit-greedy shareholders, growth-desperate banks and pay-greedy bankers were the last thing that complex and capital-intensive industrial economies needed. It would have been better to develop the banks’ traditional expertise. Also, as governments played a more significant role in the economy, it was foolish to try to separate financial and government policy.
Fortunately, not every trace of socially integrated banking was destroyed. A conference last week in London on “Mission Oriented-Finance for Innovation” included a panel on state development banks, with speakers from KfW, EIB and BNDES, a state-controlled Brazilian institution. Their presentations were persuasive. Such banks can help relatively poor countries make good use of their limited financial and technical resources. In rich countries, they can help promote ambitious economic goals such as green energy.
Unfortunately, much damage has been done. It will be much harder to create a new solid banking culture than it was to destroy the old one. The British ResPublica think tank has just published a report, “Virtuous Banking,” on the topic. It has some useful suggestions, most notably a call for more “stakeholder banks.”
However, the report inadvertently shows the scale of the challenge. The most concrete proposal for existing banks is an oath of good behaviour, including a promise that “my actions impact positively on the wellbeing of people both inside and outside my enterprise.” Good luck with that.
Something more fundamental is required to re-orient the financial system to its economic purposes. The first step is to admit that the market ideology fits badly with what banks mostly do. To start, cash management is a utility and the government should take firm control of monetary and fiscal policy, not delegate it to banks.
As for lending and investing, competitive financial markets can sometimes help, but better work will usually be done by relatively small, narrowly focussed institutions which are primarily interested in their customers and communities. If more banks were like that, there would be fewer contestants for that Bad Behaviour Award.