Restoring trust in banking depends on policymakers to establish a stable and sustainable new regulatory framework and by bankers themselves to address flawed past governance and management practices, writes Simon Lewis, CEO of the London-based association for financial markets in Europe (AFME).
Simon Lewis is the Chief executive officer of the London-based association for financial markets in Europe (AFME).
"For some prominent politicians, finance is the enemy that needs to be conquered. From Brussels and other capitals, there are waves of new regulations which leave the industry struggling to stay afloat. In Berlin and in Paris the campaign continues to launch a Financial Transaction Tax.
All are symptoms of the basic problem facing Europe’s wholesale financial services industry and capital market participants: a large and enduring loss of public trust.
The crisis which began in 2008 exposed the limitations of government, regulators and market players – including investment banks, retail banks, the rating agencies and others. All have seen their reputation suffer, but none more so than the banking industry.
The worrying signs are that this issue continues to grow. The Edelman Trust Barometer, a respected annual poll published in January, showed trust in business declining and banks and financial services again as the least trusted of all business sectors.
More worrying still for bankers, trust in banks suffered another sharp fall last year. Only 40 per cent of those asked trusted banks compared to 56 per cent in 2008.
This matters a great deal, and not just to the banking sector itself. Liquid capital markets and a well-functioning banking system are the beating heart of any modern economy. Without trust in the financial system, it will be hard to restore broader economic confidence and with it a durable economic recovery.
A new book of essays on financial reform written by leading regulators, policy-makers and academics and being published this week by the Association for Financial Markets in Europe (AFME) explores the scale of the problem and the elements of a solution.
Restoring trust, it concludes, depends on action by policy-makers to establish a stable and sustainable new regulatory framework and by bankers themselves to address flawed past governance and management practices.
The process will be long and arduous, and although significant change has already happened since 2008, there is much more to come.
Take regulation. In the past three years the global regulatory machinery has been in overdrive and has produced significant reform – especially of the framework for banks’ capital and liquidity requirements.
Paul Tucker, Deputy Governor of the Bank of England and a leading member of the global Financial Stability Board, comments in our book that this is just the beginning. Regulators, he writes, are now determined to address the problem of “too big to fail” – the systemic risks that led banks in several countries to be rescued by taxpayers.
Regulators are focused on excessive opacity and complexity in capital markets and financial exposures, and on the need for a new “macro-prudential” approach to supervision of the system which will be much more intrusive and interventionist in the face of risks to financial stability.
For the banks themselves, this means a period of wrenching change that will leave the industry of 2017 bearing little resemblance to that of 2007.
Bank balance-sheets are already shrinking under the influence of the costly new capital requirements and will continue to do so for several years. Simultaneously, many product lines will no longer prove profitable under the new Basle III capital rules and so will be axed. Economic conditions are playing a part; competition will become more severe as sluggish growth exerts a downward pressure on margins and banks compete for market share.
Many of the more esoteric and complex products that appeared at the height of the boom (such as the infamous “CDOs-squared”) have already disappeared; others will follow.
Remuneration is the issue by which the industry will be ultimately judged by the public and politicians. This year’s figures show a significant reduction of compensation levels in investment banking. More significant is the increased proportion of compensation delivered in the form of deferred stock, some of which can be clawed back in the event of poor performance in later years. Unless the industry does a better job of communicating how remuneration structures have been reformed banks will always appear dramatically out of touch with the society in which they are operating.
Another development that is less visible in public but is no less real for that is a new dialogue between bank executives and shareholders about strategy, returns and the division of rewards between investors and employees.
We can’t know precisely how the industry will look after these changes have worked their way through. But the direction is clear, including to the leaders of the banks themselves.
After a period in which investment banking played an unusually prominent role in booming economies and in the public consciousness, the industry knows it needs to return to a position in which bankers are seen not as masters of the universe but as servants of the real economy.
We have not reached that point yet, not by some distance. But when we do, the conditions will have been created in which the political attacks will subside and a measure of trust in finance can be regained."