Rebuilding Trust in Finance

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More than five years after the Lehman Brothers collapse, what steps are still needed for the financial sector to regain society’s trust?

Speakers: Howard Davies, J. Adair Turner, Guillermo Ortiz, David M. Rubenstein, Urs Rohner, Jiang Jianqing, Archibald Cox

Synopsis

The session was opened by the moderator who reviewed the indisputable fact that there is a low level of trust in banks and other financial institutions in parts of the world, particularly in the UK and US; however, this is not true in other parts of the world, such as in Canada, Australia and Latin America. The panel then gave their views on particular questions.

It was interesting to note that, in China, trust isn’t such an issue as elsewhere. But, since the financial crisis, the financial sector has put more emphasis on risk management, compliance and the rights of customers. However, the view was that the banks are still falling short of expectations.

In Latin America, which had a banking crisis in the 1990s that destroyed much of the banking system, which then took 10 years to rebuild, the recent crisis was not one for the banks per se.

No one denied that the sector needs trust and that it will be a long road to re-establish it, particularly when issues keep coming up, such as the libor scandal. Every additional incident is a real problem and makes it very difficult to rebuild trust.

There was a consensus that regulators need to finish the job, that resolution is still an issue, that “Balkanization” of regulation is an issue, and that there is a need for harmonization globally. While “too big to fail” may have been addressed nationally, it has not been addressed on a trans-border basis.

None of this is to say that strengthening the financial system will do away with business cycles. We should expect them to continue, but perhaps we can avoid a recurrence of 1929 and 2008.

While the loss of trust came in part from bad behaviour, the most important factor is that the financial sector was responsible for causing a major crisis that badly hurt many people financially.

2008 was the crash of the proposition that banks’ innovation, structuring, etc. is good and making the system better and more competitive. The official sector got it wrong, as did academia. Central bankers seemed to underestimate the macro importance of the financial sector and that financial services are very different than manufacturers, unlike any other markets. We still don’t fully understand why financial markets have such an impact.

The question of incentives was also addressed. Incentives may have contributed to, but were not the most important factor in the crisis. They may not have been correct, but massive changes have occurred since then.

It is essential that trust be rebuilt where it has been lost. Reputation is critical to financial institutions. There will be no quick fixes. Many steps will have to be taken, including bankers engaging more with politicians and regulators rather than fighting them, better explaining to the public what they do and the benefits thereof, and doing a better job in leading their organizations by example in doing the right things.

The consensus was that much has been accomplished on many fronts, but that there is more to be done and it will take time.

Source : World Economic Forum Annual Meeting 2014

 

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