The Dilemmas of Regulating Banks
A summer of crisis amongst major banks dramatises the challenge of regulating giant corporations.
In almost every field of public life, regulation depends on common consent. If it not generally accepted that the public good is at stake, and that the state has an inalienable responsibility for that public good, effective regulation becomes virtually impossible. By definition regulation entails limiting both the self-seeking of individuals, and the profiteering of businesses, so as to promote a broader well-being. Without broad public consent the mechanisms of regulation will either become coercive and oppressive, as the state enforces its power; or they will be subject to endless, wasteful and expensive attempts by regulators and other social actors to outwit each other: 'speed traps' on motorways, for example, are deemed necessary to discourage speeding; technologies are developed to warn drivers of these speed traps; the government seeks to ban the technologies: and so on.
Over about the last twenty years many banks, in developing expert divisions in financial speculation, have made the maximisation of profit a virtually absolute aim. They have taken advantage of the fact that their business requires such specialist skills, is so complex, so global in character, is processed so rapidly and with such innovative technology, that the regulators seem inevitably to be one step behind. This problem has already exercised the European Commission, as noted recently in Europeinfos.
Even since July however, things have changed. There have emerged an astonishing number of allegations of gross incompetence, irresponsibility or sharp practice that, in some cases, amounts to alleged criminal conduct. Here is a highly selective list of current cases, among major international banks, Barclays, Credit Suisse, Deutsche Bank, HSBC, J. P. Morgan, , Standard Chartered, UBS. Some of these allegations arise from the financial crisis beginning in 2008, others concern fundamental manipulation of the finance system itself, such as the case of Barclays and 'Libor' which led to the resignations of both that bank's Chairman and Chief Executive. Cumulatively, such cases threaten to bring the entire banking sector into grave disrepute.
Even apart from accusations of criminality or outright corruption, the predatory nature of major finance houses has become clear. Goldman Sachs was required by US senate investigators to explain why it encouraged investors to buy mortgage-based products it believed would fail, while deceiving them about the bank's own investment positions. It is also accused of colluding for years in helping the Greek government hide its real deficit, by selling credit default swaps. The chief executive of the hedge fund Moore Capital Management has recently refunded about $2 billion to investors, 25 percent of the main fund he manages, because of ‘a frustrating inability to execute a career-defining macro trade that would capitalise on the euro zone’s disintegration.’ Imagine the challenge of devising a Eurozone governance structure adequate to regulate, impartially, a corporation eager to 'capitalise on that zone's disintegration'.
It is in this context that Commissioner Barnier has recently advised that he proposes to bring all Eurozone banks under the supervision of the European Central Bank. This is a separate issue than the proposed Banking Union, though of course related.
Many thorny issues will need to be resolved: for example how would the role of the ECB complement, without duplicating, that of the authorities of the state where any given Eurozone bank was registered ? In general, the problem of how to regulate a body that wishes to resist regulation or to exploit regulatory gaps, seems certain to be one of the foremost political and technical problems of the next decade. The risks are clear, both of failure and of paralysing bureaucratic excess. Nevertheless, we cannot go back to the situation in which banks claimed state protection (as being 'too big to fail' and essential to economic life), whilst also claiming the liberty to operate outside effective control.
Frank Turner SJ