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​The Things We Do: Is the Culture of Banking Dishonest?

Roxanne Bauer's picture

Despite its relevance to the broader economy of states, there exists little empirical information on the culture of the banking industry. Identifying the effects of business culture poses several challenges because comparing employees in one sector to those in another can be misleading. Some professions may naturally attract different kinds of people, making it tricky to separate cultural factors from individual ones. Moreover, the financial industry is broad and comprised of many different kinds of businesses and institutions, with some more focused on the consumer and others more focused on fiscal details.

Attempting to shed light on the subject, academics from the University of Zurich designed an experiment inspired by the economic theory of identity.  Identity economics states that economic choices are not only based on personal taste but also on what an individual considers to be appropriate.  Whether a choice is appropriate or not depends on a person’s social identity– their sexual orientation, race, religion, occupation, or where they live.

In the experiment, 128 employees from an international bank, with an average of 11.6 years of experience in the financial sector, were split into two groups. About half of the participants worked in a core business unit, like private banking, asset management, trading, or investment management.  The other half worked in support units like human resources or administration. They were randomly assigned to a treatment or control group.

Capping the Bank-Fund Annual Meetings: Chiding Ethics Lapses, a Spokesman for an Even Higher Authority

Christopher Colford's picture



Amid the week-long procession of buttoned-down, business-suited speakers who commanded the stage during the Annual Meetings week of the World Bank and International Monetary Fund, the most thought-provoking comments may have come from someone who was not outfitted in business attire at all – but who was instead wearing a clerical collar.

It seemed fitting that the remarks by (some might say) the week’s most authoritative participant occurred on a Sunday morning, at an hour when many Washingtonians habitually heed an authority even more elevated than the Bank and the Fund. The major attraction at the IMF’s day-long “Future of Finance” conference was the Archbishop of Canterbury, Justin Welby, whose stature lent a special gravitas to the already-serious tone of the Fund forum’s focus on scrupulous ethics as a bedrock principle of sound capitalism.

On a panel with some of the titans of worldly finance – including the leaders of the IMF and the Bank of England – only someone of Welby’s ecclesiastical renown could have stolen the show. Although he did his down-to-earth best to try to avoid upstaging his fellow panelists – quipping, “I feel rather like a lion in a den of Daniels at the moment . . . slightly nerve-wracking” – the leader of the worldwide Anglican Communion was clearly the marquee draw for the throng that packed the Jack Morton Auditorium, spilled beyond the extra overflow rooms and jammed the adjoining corridors.

Citing the need for “heroism in the classic sense” to overcomethe spirit of “recklessness” that recently pervaded much of the financial industry, Welby called for a return to “ethical and worthwhile banking.” He urged everyone working in finance to aim to “leave a mark on the world that contributes to human flourishing.”

Welby – himself a former financier, who traded derivatives and futures before he joined the clergy – recounted the misgivings of the mournful bankers whom he had interviewed while serving as a member of the U.K.’s Banking Standards Commission in the wake of the 2008 financial crash. Welby recalled the lamentations of a deeply penitent banker who had been “broken by the experience” of leading his bank to ruin: In retrospect, reasoned the banker, “you can either have a big bank that’s simple, or a small bank that’s complex, [but] you cannot have a big complex bank and run it properly. . . . If only we had kept things simple.”

Welby’s call for the highest standards of conduct in the financial sector was matched by the exhortations of his fellow panelists – including IMF Managing Director Christine Lagarde, who reminded the audience that every financier must see himself or herself as “a custodian of the public good.” Lagarde's message was underscored by Bank of England Governor Mark Carney – who also leads the global Financial Stability Board – who deplored the pre-crash “disembodiment and detachment of finance” from the rest of the economy.

Only by upholding the most exacting ethical standards, said Largarde and Carney, can financiers rebuild public confidence in the financial sector – confidence that, in Lagarde's words, “builds over time and dies overnight.”

The regrets voiced by the panel’s private-sector financiers contributed to the panel’s almost confessional tone.

“If we can’t get the basic incentives right, it’ll be hard to get the right outcomes,” said Philipp Hildebrand, who had served as a senior central-bank official during the financial crisis before returning to the private sector. He reflected that “with wrong incentives, you end up with a wrong business model,” which in turn attracts “the wrong kind of people” who are prone to take excessive risks. Thus he underscored the need for “a personal transformation” within the spirit of every business leader.

Putting an even sharper point on the source of the problem, longtime financier Kok-Song Ng regretted that “a virus entered the system” in the years leading up to the crash, as financial firms deliberately recruited profit-driven “mercenaries” to run their trading desks. Those firms ignored the explosive risks being taken by their hired-gun traders, because they succumbed to “the great temptations for those in ‘the money world’ to want to make a quick buck” no matter how dangerous their tactics might be.

Quote of the Week: Raghuram Rajan

Sina Odugbemi's picture

Central bankers have had enormous responsibilities thrust on them to compensate, essentially, for the failings of the political system. And my worry is we don’t have sufficient tools to do that, but we’re not willing to say it. And, as a result, we push as hard as we can on the existing tools, and they may create more risk in the system.” 

- Raghuram Rajan, Governor of the Reserve Bank of India since 4 September 2013. Prior to his post at the Reserve Bank of India, Rajan was chief economic adviser to India's Ministry of Finance in 2012 and chief economist at the International Monetary Fund from 2003 to 2007.
 

The Things We Do: Saving for Change

Roxanne Bauer's picture

At the basis of communication and public policy are assumptions about human beings- their rationality or irrationality, their foibles, wants and preferences. A lot depends on whether these assumptions are correct. In this feature, we bring you fascinating examples of human behavior from across the globe.

Saving money is hard.  However, it is also considered to be necessary for making large purchases like a house or car, opening up a business, or planning for retirement. Saving can be particularly difficult for the poor who live day-by-day and do not have much disposable income.  In wealthier countries, financial institutions offer a variety of products to help their clients set aside savings, but in poorer countries, there are fewer savings options. Many poor people end up hiding cash, investing in assets such as livestock or land, or engaging in informal savings arrangements

Yet, for those who have even a little money to stow away, the benefits can be enormous. Massachusetts Institute of Technology (MIT) economists Abhijit Banerjee and Esther Duflo have found that even those who live on less than $1 per day have the ability save and often spend money on nonessential items such as alcohol, tobacco, and televisions.  Moreover, when poor people increase their earnings, they spend only two-thirds of their increased income on food.  These findings suggest that poor people do have funds to save.

But why is it so difficult for people of all income levels to save?

Quote of the Week: John Maynard Keynes

Sina Odugbemi's picture

“A sound banker is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.”

- John Maynard Keynes, a British economist whose ideas have fundamentally affected the theory and practice of modern macroeconomics, and informed the economic policies of governments. He built on and greatly refined earlier work on the causes of business cycles, and is widely considered to be one of the founders of modern macroeconomics and the most influential economist of the 20th century. His ideas are the basis for the school of thought known as Keynesian economics, and its various offshoots.

Quote of the Week: Philip Stephens

Sina Odugbemi's picture

 "It is time to admit defeat. The bankers have got away with it. They have seen off politicians, regulators and angry citizens alike to stroll triumphant from the ruins of the great crash.”

- Philip Stephens, associate editor and chief political commentator of  the Financial Times.
 

Longreads: Can Graphene Drive the Green Economy?, Women and Mobile Financial Services, With River Blindness ‘You Never Sleep’

Donna Barne's picture

Find a good longread on development? Tweet it to @worldbank with the hashtag #longreads.

 

LongreadsA video about a “scientific accident that may change the world (or at least your battery life)” went “viral” in February.  Researchers at University of California, Los Angeles, found a way to make a “non-toxic, highly efficient energy storage medium out of pure carbon using absurdly simple technology,” says ReWire. The “graphene” battery is being touted as capable of “super-fast charging of everything from smartphones to electric cars,” according to ReWire. Responding to Climate Change (RTCC) asks whether the technology holds promise as a way to reduce greenhouse gas emissions. “Replacing heavier materials in vehicle manufacture with graphene, particularly in aircraft can lead to substantial fuel savings,” says RTCC.  Gizmodo anticipates how graphene could transform the gadgets of the future.

Rethinking the Role of the State in Finance

Merrell Tuck-Primdahl's picture

Is the world ready for the advice that governments can better balance the need for credit and emergency support for banks with measures to promote transparency and competition when crises erupt? Governments want every viable tool possible in their arsenal to fight crises, but a bit of 'less is more' and a cautionary re-examination of the role of the state in finance may be in order. This is the thrust of the new Global Financial Development Report (GFDR) 2013: Rethinking the Role of the State in Finance, released Thursday September 13, just ahead of the fourth anniversary of the collapse of Lehman Brothers, which marked the full onset of the financial crisis. The GFDR analyzes four characteristics of banks in over 200 economies since the 1960s and comes with a useful treasure trove of online data.

Check out the GFDR website here.

The Influence of Greece's Debt Crisis on the Banking Sector

Sergio Schmukler's picture

The crisis in Greece and the Eurozone has escalated as depositors flee banks in fear not only of the consequences of sovereign default but also of Greece abandoning the Euro. Unfortunately, this development makes the crisis much deeper and more difficult to manage. As we (along with Eduardo Levy Yeyati) highlighted in a VoxEU piece in June 2011, the main risk of the Greek debt crisis was its potential spillover to the banking sector.

The Unbanked in South Asia

Leora Klapper's picture

What is the account penetration among women in South Asia? Has the spread of bank agents affected how adults do their banking in Bangladesh and Nepal? How are people all over South Asia saving, borrowing, making payments and managing risk?

In the past, the view of financial inclusion in SAR has been incomplete, and the details unsatisfying. A patchwork of data from diverse and often incompatible household and central bank surveys was the only information available with which to construct a regional picture.

With the release of the Global Financial Inclusion Indicators (Global Findex) we now have a comprehensive, individual-level, and publicly-available database that allows for comparisons across 148 economies of how adults around the world manage their daily finances and plan for the future. The Global Findex database also identifies barriers to financial inclusion, such as cost, travel time, distance, amount of paper work, and income inequality.


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