Can bankers be ‘socially useful’ in the future?

In the final part of our six part series studying whether bankers are good or bad for society,
we look at how banking might change tomorrow and particularly the influence of the Chinese and Islamic Financing principles:

• Part One: Why Bankers are essential for society
• Part Two: A Bankers pivotal role between good and bad
• Part Three: A Bankers' role in religion
• Part Four: Bankers in historical booms and busts
• Part Five: Bankers today
• Part Six: Bankers tomorrow

[If you just want to get the slides and download the
whole speech, click here]

Bankers Tomorrow

I said at the start that there is a raging debate about whether banking is socially useful or useless today.

The leading bankers of Britain agree that there are issues, but make clear that these issues are in isolated pockets of the market and not endemic to banking overall.

And many of them are questioning the moral compass of bankers and asking if their direction is facing the path of good or bad. Without a moral tether to banking, greed runs unchecked and this is one of the issues which they are grappling with today.

In particular, it is clear that banking cannot allow the isolated few who harm the markets to continue for the future, and therefore will be seeking to avoid reckless innovation in complex instruments, such as the flawed derivatives models that created this crisis.

However, avoiding flawed derivatives in the future will be a challenge as innovation always has risk and risk is the method for creating arbitrage and profits. Can we truly regulate with foresight for markets that are complex, technology turbocharged, global and hugely innovative and therefore full of risks?

As Stephen Green says: “To restore trust and confidence, we will need to recognise the moral dimension of what has happened, and to restore a proper sense of values in our corporate lives.”

But how do you do that?

How do you bring the moral compass back into banking?

What is the role of morality and ethics in finance?

It has to come back to the core view that banking is only bad if the policymakers allow it to be bad.

This is because banking is all about making money. The more money you make the better. The better it is for the economy and for the society the bankers represent.

However, if the policymakers do not understand how bankers are making money, the instruments they use and the technologies they deploy, then they allow bankers to become bad. They allow the bankers to become like the kid in the candy store.

The kids are needed in the candy store for the store to survive. The store can only make a cent if the kids come and buy the sweets. But if the store owner leaves the store open, allowing the kids free rein to eat the sweets, then the kids will trash the store, eat all the sweets and make the store bankrupt.

This effectively what has happened with the banking system.

The policymakers and legislators are the storeowners and the storeowners lost the plot.

They thought Greed was Good but Greed is not Good. Greed is one of the seven deadly sins and that is why bankers became bad for society.

Banking is a force for good only as long as the policymakers – the owners of the store – direct it that way.

Without such direction, bankers will ruin society, just as the kids will trash the candy store.

It takes me back to my opening foundations of this speech with regard to the fact that banking is wrapped up in the essence of society, civilisation, politics, power and religion.

It can be used as a moral force that stops society falling into anarchy by using money as a method to regulate our lives and lifestyles. It can be used to raise people from extreme anguish to comfort, and to create peace and harmony. Or it can be allowed to become an unregulated ghastly mess, a force for bad, where war and friction abounds.

As we look for solutions to this crisis, you will not find it in the Anglo-Saxon model of finance, as this is the model that has failed our moral compass.

Nor will you find it in the European model of finance, where we have enough challenge in trying to agree a Constitution, let alone a way of making banking work for the future.

No, if you want to look anywhere for the future of finance and banking, you need to look towards Asia and, in particular, China.

As China moves from being communist to capitalist, what form of capitalism will they create?

Well, one thing is clear. It won’t be like ours where it’s every man and woman for themselves.

The concept of survival of the individual and our selfish attitude to life and living is not the one that Asia will employ.

Asia has too strong a history of the commune, the working together for the common good, the family oriented way of life, to drop that history.

From the keiretsu’s of Japan to the chaebol of South Korea, the family operated structures of Asia are a clear model of management that China and many other Asian economies can operate effectively.

And this is how China will change the world of banking, by bringing the strength of the committee-based approach to finance, the family-based approach, the approach where an individual voice has strength but not finality.

And China will influence our world of banking in this way because their banks are rising rapidly to become the most important global banks. That is why HSBC’s Chief Executive, Michael Geoghegan made the decision to move his office to China recently.

When the announcement was made at the end of September, the statement said that Michael Geoghegan will relocate to Hong Kong because it is "the group's most strategically important region". Bear in mind this is a global bank.

Meanwhile Vincent Cheng, Chairman of HSBC's Hong Kong bank and a main board member, announced he would now focus upon moving into China to "build its international bank leadership".

China and Asia is the future. America and Europe the past.

And in this context, there’s one other piece missing.

If the balanced Buddhist approach to banking breaks through, expect it to be mingled with a little bit of Islamic spice.

After all, Islamic banking has grown in stature and interest mightily in the past decade, particularly since 9/11 when the world’s authorities realised that the best way to move towards peace and harmony is through financial inclusions rather than exclusion.

For example, Islamic Finance has seen stellar asset growth of over 30% over the past 5 years, and revenue growth is in excess of asset growth at around 44% CAGR between 2003 and 2007. Last year, the Islamic banking sector grew by 27%, versus 19% for the conventional sector, and this rate of growth is predicted to continue at around 20% CAGR for the future.

As a result, Islamic finance assets worldwide total more than $800 billion today, are forecast to reach over $1 trillion next year and, according to predictions, this figure could increase to around $4 trillion over the next six years.

Not bad for an industry that only saw its first European bank specialising in Islamic Banking open its doors five years ago . Speaking of which, the Islamic Bank of Britain was the first European Islamic Bank, opening its doors in 2004 to their first customer who just happened to be a non-Muslim Christian from the East End of London who believed their way of banking sounded better than traditional ways of banking.

Conclusions

In conclusion, it is a basic fact of trade and development that without leverage and risk, you cannot have progress or innovation.

This is why our banks and bankers, our financial markets and financiers are good for society.

They allow nations and the human race to develop, make progress and innovate.

This is why they are socially useful.

Whether we like it or not, if we are to develop as a society, we have to live with crisis in the financial markets. To have progress, we need turmoil. To improve, we need to experience pain.

The pleasure pain principles apply as much to economic development, innovation and progress fuelled by financial markets that operate freely, as they do to any other form of human f
unction.

And the fact is that you cannot expand, grow, develop or innovate, you cannot progress, if you do not have speculation and risk.

As Will Hutton stated in a recent article, “From 1750 to 1870, Britain won wars, assembled an astonishing navy, built an empire and launched an Industrial Revolution to become the envy of Europe, yet the national debt was consistently above 80% of GDP ... periods when the over-riding preoccupation has been lowering the national debt have coincided with industrial, economic and strategic decline.”

Bankers can be bad for society only if they are allowed to be, but are good for society in enabling revolutions in commerce to take place.

From the revolution of Cities and Civilisation in Ancient Sumeria to the Empires of Rome, capital and capitalism was integral to growth and development.

From the foundations of merchants and corporations in Renaissance Italy to the colonisers and industrialisers of Victorian Britain, innovations in banking and financial instruments were critical to enabling progress to take place.

And from the creation of white-collar workers to the globalisation of trade, complex but innovative financing and capital were at the heart of enabling growth.

So, on the one hand bankers can be bad for society if they are allowed to indulge in pure hedonism and immersion in greed with impunity. If a banker can take risks and speculate without any thought for their accountability or retribution for their mistakes, then bankers will be bad for society.

But if banks are tethered to a path that focuses upon the right results for nation’s economies, enabling growth and prosperity for those nation’s, and raising the lot of citizens from poverty to comfort, then bankers can be good for society. And by facilitating commerce, growth, trade and progress, bankers do create socially useful services that are good for society.

The truth about today’s society and today’s bankers is that they have been allowed to be bad.

A little bit like the bull in the china shop or the kid in the candy shop, a banker who is not tethered by some form of accountability will just run amuck.

This has been the issue with this crisis: that a small group of investment bankers have been speculating, taking risks and dealing in get rich schemes without risks, accountability or retribution for the actions they take.

This has to change.

In future, banks and bankers, policymakers and lawmakers, regulators and politicians must all be accountable for the risks they create in our fragile model of economic development.

That is why they are all working together in unison to try to create the next generation of financial markets and financial market rules.

And it needs this collaboration to create a safer market for the future.

We still need banks and bankers to take risks to enable progress, but we cannot allow banks and bankers to take such risks with no rhyme or reason, accountability or control.

In particular, we cannot allow bankers to operate without some form of fear that keeps their moral compass focused upon the good for society, rather than the bad.

The bad only occurs when bankers can indulge in greed with impunity.

If bankers are allowed to take risks purely as a ‘get rich quick’ gamble, then they will be bad.

Bankers need censure and responsibility to be at the heart of their actions. There needs to be fear about how risks are assessed and actions taken, not impunity and irresponsibility.

Herein is the real concern you, me, we, them and us, all have right now, as we all ask whether we can really allow a system to continue where bankers are rewarded for taking risks without responsibility.

If we live with that system then yes, bankers will be bad for society.

For bankers to be good for society, the whole system – not just the banking system, but the politics and religion of that society – should have a moral compass focused upon things that are socially useful and not socially useless.

Otherwise, greed becomes the priority at the expense of judgement.

Greed must be tempered by fear.

Therefore, for bankers to be good for society, there must be a structure where risks are tied to rewards, responsibility is measured by accountability and greed is tempered by fear.

Thank you.

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