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Wayward Bankers: An Epic Accountability Challenge

Sina Odugbemi's picture

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:

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:

  1. You need some way of knowing what is going on, of monitoring what they are up to; and
  2. 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

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Everybody hates big bangs, it seems. But financial institutions of all sizes disappoint depositors, taxpayers and communities for various reasons. Because they are so vital to the economy banks face daily challenges from criminal entities that continue to look for weaknesses in the international financial system. Both greed and the difficult economy have caused individuals (bankers and their clients) to rationalize attempts at illegal activity such as engaging in trade with high-risk countries, major rate manipulation and money laundering. It’s more about the sale and less about risk management. This is a recipe for failure and public disappointment. To fix the problem bankruptcy laws need some tweaking to protect taxpayers from bailing out big banks when they fail, period. But it is up to a bank’s board of directors and executive management to place strong emphasis on maintaining compliance with regulations, by training their employees annually on adhering to policies, procedures and protocols of bank operations and risk management. Did you say break up big banks? Wait a second. It is more practical for banks to train their employees on regulations and their consequences than to break them up even if Sandy Weill, the Ex Citigroup CEO, supports the idea. He said so on July 25, 2012 while speaking on U.S. CNBC’s Squawk Box. Mr. Weill aggressively built Citigroup into a behemoth comprised of retail and investment banking. How bank employees understand regulations and the consequences for non-compliance is the first step to filling the accountability gap in the banking system. It’s an opportunity not to pass up.

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