Even the strongest supervision cannot guarantee good conduct.
So said Mark Carney this morning. He was addressing the attendees of the 7th Annual Thomas d’Aquino Lecture on Leadership in London, Ontario.
Carney led a discussion on how professionals can rebuild trust in the global industry, a concern for advisors across the globe. He mainly stressed the onus falls equally on the shoulders of regulators, firms and individuals.
Read:
Trust in financial industry declines: survey
Building investor trust starts with advisors
“The re-discovery of core values [will be essential], and ultimately this is a question of individual responsibility,” said Carney. “More than mastering options pricing, company valuation or accounting, living the right values will be the most important challenge for the more than one-third of students who go into finance every year.”
He adds, “Over the past year, the questions of competence have been supplanted by questions of conduct. Several major foreign banks and their employees have been charged with criminal activity, including the manipulation of financial benchmarks, money laundering, unlawful foreclosure and the unauthorized use of client funds. These abuses have raised fundamental doubts about the core values of financial institutions.”
Read: Investors wary of scandal
He highlighted that trust is stressed at multiple levels of the industry, rather than just between customers and their advisors or banks. There’s also been a breakdown of loyalty and faith:
Between banks and shareholders: Most major banks outside Canada are now trading well below their book value (Chart 1).
Between banks and debt-holders: Bank credit ratings have been downgraded, and even the revised ratings reflect continued reliance on sovereign backstops (Chart 2).
Between banks and supervisors: Concerns over competence, conduct and, ultimately, culture have fed supervisory concerns and built the political case for structural measures like prohibiting activities like proprietary trading.
Between supervisors in advanced economies: The industry fears support from parent banks cannot be counted upon in times of global stress, so measures to ring fence the capital and liquidity of local entities have been proposed. These trends could substantially decrease the efficiency of the global financial system.
Between emerging and advanced economies: Given that the crisis originated in the advanced economies, the incentives for emerging and developing economies to control their financial systems is particularly pronounced. It’s fragmenting how institutions are managed globally.
Read: Industry needs to win back investors
Carney adds there are five core things to consider when talking about rebuilding the financial sector: capital, clarity, capitalism, client connections, and the missions and core values of major institutions.
In his conclusion, he was hopeful. He conceded major banks have made progress despite facing a long road ahead.
“Business models will change, says Carney. This is being pushed by “the new Basel capital rules, and by the decreasing reliance on ratings agencies. Market infrastructure [is] improving, and banks—and, crucially, their investors—[are] developing a better appreciation of their prospects for risk and return.”
Read: Banks need to prioritize morality
He adds, “The public sector needs to be more vocal and appreciative when the industry makes major contributions. This has been the case with the Enhanced Disclosure Task Force [formed by the Financial Stability board], as well as in work on bail-in debt, which is a key element of ending too-big-to-fail.”
Read: Banks are never too big to fail: IIF
In addition, he says major global organizations are recognizing the need to address their corporate ethics.
Read: