It is impossible for any industry to survive if it relies on the actions of governments and regulators to watch over it in order to make sure that it does not blow itself apart. Yet, this is the precise position in which the banking industry now finds itself.
In seeking to identify and rectify the causes of the last financial crisis, regulators and legislators on both sides of the Atlantic have blamed derivatives, deregulation, excessive proprietary trading and the collapse of Glass Steagall, the law which separated investment and retail banking.
As such, said legislators and regulators have responded to the crisis by doing more of what they believe they do best—which is enacting more legislation and more regulation. There is no question that some of this is welcome as it focuses on improving the identification, assessment, management and mitigation of risks.
For example, the Basel III rules aim to improve the ability of banks to determine, allocate and manage their capital and liquidity. The Dodd Frank Act includes the Consumer Finance Protection Bureau. The aim of the CFPB is to avoid a repeat of the fraudulent loans at the heart of the last crisis. The Recovery and Resolution sections of Dodd Frank require banks to create living wills—forcing them to think about what they would do in the event of a disaster.
Banks in turn have placed even greater emphasis on governance and internal controls and are doing their best to respond to every legislative and regulatory demand.
Taken together, this emphasis on more legislation, more regulation, more governance and more controls has resulted in a focus on managing the “risk culture” of banks. However, this is not how great organisations are created. An industry cannot be sustained if its greatest focus is how to avoid disaster and not on how to address the fundamentals of its business.
The question is therefore what must bankers do? How do they create institutions that are economically and competitively sustainable?
Well the first and most important thing is that regulators and legislators have to recognise that it is not nor will it ever be in their gift to create such entities. Simultaneously, bankers must recognise and accept that it is their responsibility to create banks and an industry which is recognised for its competitiveness and innovation as well as acting in the best interest of people—and not for causing the type of pain that came with the financial crisis.
How can banks make such a change? History provides many fine examples and the story of Henry Ford and the Model T is one of the best.
Henry Ford set out to create the Model T at a time when cars were generally very expensive and required a high degree of expertise to manage and maintain. As such, cars were beyond the means of the average person in terms of both price and maintenance costs.
However, by focusing on both of these customer-oriented elements, the price and the maintenance, Henry Ford eventually adapted and revolutionised his manufacturing methods to produce the Model T and with it a whole new world of motoring. The Model T literally had mass appeal and not only transformed the auto industry it was a defining moment in history.
Further, in order to ensure that his new mass production system was successful, Ford paid his workers twice the going rate and he made no distinction as to the race or ethnicity of the workers he employed. This new approach to manufacturing catapulted the average auto worker into the middle class which in of itself was another defining moment in history.
Henry Ford recognised the human ecosystem within which his business existed and was successful because he directly addressed it. Moreover, although safety improvements to cars were to come later, at that time, Ford did not need an army of regulators to tell him that he needed to make a product that was in the best interest of the average customer—that was always his original intent and one which he had expressed as follows:
“I will build a car for the great multitude. It will be large enough for the family, but small enough for the individual to run and care for. It will be constructed of the best materials, by the best men to be hired, after the simplest designs that modern engineering can devise. But it will be so low in price that no man making a good salary will be unable to own one – and enjoy with his family the blessing of hours of pleasure in God’s great open spaces.”
Similarly, the Microsoft’s, Apples and Googles of this world did not need regulators and legislators to tell them how best to create new products and services that people would want to either line up for hours to get their hands on or spend endless hours having fun with.
In other words what banks need most of all is not more legislation, more regulation, more governance and more controls but a human transformation.
What kind of commitments would they have to make to even begin accomplishing this?
Those interested can read the following article:
Jonathan Ledwidge is the author of the book Clearing The Bull, The Financial Crisis And Why Banks Need A Human Transformation (iUniverse).