The global community faces an epic governance and accountability challenge: the big banks that we all use either directly or indirectly are out of control and nobody seems to know what to do about them. As we mark the fifth anniversary of the global financial crisis this month, it appears as if every new week brings news of a fresh banking scandal. The recent list:
- JP Morgan Chase disclosed a $2 billion loss from dubious trading activities. According to the New York Times, the latest figure is $5.8 billion and rising.
- An exchange rate manipulation scandal is rocking the City of London: the so-called Libor Scandal. Several big banks are said to be under investigation.
- A committee of the United States Senate accused HSBC of operating a money laundering conduit for ‘drug kingpins and rogue nations’. Vast sums are allegedly involved.
- New York’s Department of Financial Services recently accused Standard Chattered of, to quote the Economist, ‘executing 60,000 secret transactions worth $250 billion for Iranian customers’ in breach of sanctions legislation. The bank has now agreed to pay a modest fine.
There have been other scandals about how the big banks facilitate tax evasion on a colossal scale, help crooks and criminals, routinely launch dodgy maneuvers in defiance of regulations and so on. All this is going on at a time when the effects of the global financial crisis are still with us, inequality is worsening, middle classes are being impoverished, youth unemployment is ballooning almost everywhere, and the really poor…well, austerity measures are attacking them while social safety nets are being ripped up.
There are two elements to holding anyone (individuals, institutions, governments) accountable:
- You need some way of knowing what is going on, of monitoring what they are up to; and
- You need ways of effectively sanctioning transgressions.
Let’s review the world of the massive global financial institutions in order to find out how these two requirements are supposed to be met.
- The Boards of the Banks: Boards are supposed to be the first means of making banks accountable, but on the evidence available they are often weak, ineffectual, ignorant or complicit.
- Self-regulation: the theory is that these are gentlemen and women of honor whose word is their bond. Well, we all know now that what we have is more like a network of cabals.
- Regulators set up by governments including central banks, securities and exchange commissions, and the entire alphabet soup of them. They are supposed to both monitor the banks and punish them when they misbehave. This is where the truly sad story is. For, it is clear now that the titans of finance are so politically powerful that they can water down regulations they don’t like and overawe politicians. And they are masterly at capturing their own regulators. And if a political leader is brave (or foolhardy) enough to insist on accountability the titans of finance will devote mind-boggling sums of money to defeating him or her.
- Public Opinion: Financial institutions are supposed to fear loss of reputation because it might make depositors flee. But these days, they don’t really fear public opinion. What they get up to is so beyond the ken of ordinary citizens, and so cloaked in secrecy that they are sure they can get away with most of their dodgy moves. Moreover, public outrage, while real, appears general and diffuse. If people come to believe that their deposits are no longer safe in a particular bank there will be a run and the bank will most likely collapse…unless, that is, the bank is deemed ‘too big to fail’. So, the big global banks live in an earthly paradise: they have figured out how to privatize the gains of their reckless moves while socializing the losses.
It seems clear, then, that where the big global financial institutions are concerned, we don’t have effective ways of monitoring what they are really up to or of sanctioning transgressions. It is an epic accountability challenge.
What is to be done? Gideon Rachman of the Financial Times thinks the backlash is on and has gone global. Maybe, maybe not. What I believe is that it is going to need more than a backlash, especially an unfocused, non-strategic one. It is going to need a powerful, globe-spanning multi-stakeholder coalition of governments, civil society leaders, powerful but aggrieved business clients of the banks, and so on. It is the only way that tough new rules will emerge, regulators strengthened, brave political leaders protected; in other words, it is the only way we are ever going to be able to hold these financial behemoths accountable.
Photo Credit: flickr user SEIU International