Finance made social
The social contract between the banking system and society is fundamentally broken. We deserve a financial system that we can all be proud of, one that is fairer and more sustainable than the current iteration, writes Kerim Derhalli.
What is to be done? Firstly, we need to recognise explicitly the essence of that social contract. Then the parties to the contract need to re-embrace it practically and emotionally.
When I began my career in banking over 30 years ago, it was in the face of muted opposition from my parents. My father wanted me to become a doctor. My mother wanted me to become a lawyer, like much of her family. I chose instead to go into banking. I believed that my career would be no less noble than medicine or law. Banks, I reasoned, played a critical social role intermediating the flow of savings into investment and promoting growth.
It might be unfair to blame it on Latin America, but I hadn’t reckoned with the fallout of the defaults of the early 1980s. Institutions, which had been gladly recycling petrodollar surpluses to needy governments, got a nasty shock to discover that sovereign default was not a theoretical impossibility but a financial reality. I am sure that many other factors contributed to the growth of the securities business, but the need for banks to manage risk by packaging and disposing of assets was made evident by those defaults.
And so, perhaps it was unintentionally, and nothing more than the creative response of an industry to an unexpected problem, that the banking system transitioned from its core purpose of intermediating savings and investment to the intoxicating process of trading securities. But the road to hell as they say is paved with good intentions. Along that road, the banking system appears to have become disassociated from its primary role of lender and corrupted by the temptations of principal trading.
Twenty-five years later and staggering losses sustained by many commercial banks, we have a real social problem that goes beyond the issue of shareholder returns and dividends foregone. We have resentment against the banking system on a societal scale. Resentment, as a good friend has taught me, arises from broken expectations. In the eyes of the public, banks are guilty on several charges. Not only did they bring the capitalist system to the edge of destruction through poor risk management, but they have also abandoned their role as the intermediary for savings and investment and brought into question the validity of the entire economic model upon which our society is based, while continuing to pay themselves a super-normal wage.
It takes leaving the City, not only to understand just how deeply that resentment is felt, but how justified it is. As someone who benefited from the system for so long, that is a shocking admission. But I am appalled and embarrassed by the constant litany of unethical practice that continues to emanate from a seemingly unrepentant industry. The tragedy of it all is that those most responsible for these abuses comprise a handful of senior executives whose misdemeanours are colouring the entire banking population with an indelible reputational taint. The ordinary financial sector employee is as much a victim of the crisis as the average citizen.
There are both rational and emotional cures to this malaise. A few policy responses have been suggested:
- Firstly, an attempt to impose greater ethical standards, perhaps a Hippocratic oath for bankers;
- Secondly, the separation of commercial and investment banking with constraints imposed on proprietary risk-taking;
- Thirdly, the creation of higher shareholder returns through reduced compensation for employees and reduced costs through technological automation.
These changes don’t go far enough. The world has moved on. Patching up the old order is simply not an option.
I believe that we are entering a post-capitalist era, in which society’s expectations of the private sector will differ materially from the past. In my opinion, every enterprise will need a demonstrable social purpose at its core. Not the after-thought of a CSR program, but a defining purpose that generates profit as a by-product of the social utility provided.
In this new world, collaborative behaviour by engaged consumers will continue to disrupt conventional competitive business models. As human beings we are naturally programmed to collaborate not compete. As Charles Darwin said: “In the long history of humankind those who learned to collaborate and improvise most effectively have prevailed”.
The finance system will not be sustainable until it adapts emotionally to this new order. The efficient intermediation of savings and investment, nationally or globally, has been critical to human growth and evolution. It is simply too important to be left to just a few people, especially where those people are no longer trusted.
So who can be trusted with our financial system? Going forward, everyone must have a stake in the financial system. At a time when technology is empowering individuals in so many areas of our lives does it make sense that money and finance remain the preserve of an informationally privileged elite?
For too long the banking system has created barriers to entry. Jargon, mathematics, elitism, information costs have prevented people from accessing the financial world. All that must change. The rich kid needs to open his bedroom door and invite the neighbours over to share his financial toys, not just cycle past them on his latest smart birthday present.
When people realise how much fun financial markets can be, there will be no going back. Equally, the enormous intellectual capacity of the City should be put to good use. If we can re-connect society with finance, if we can make finance social, we can unleash our economic potential in a sustainable way.
What do we mean by social? For us it means three things – fun in the sociable sense, fair in the political sense, collaborative in the behavioural sense. At invstr our purpose is precisely that. We want to make finance fun, fair and collaborative. We want to take money out of the banks and put it back in peoples’ pockets. Where it belongs.