Last week there was the meeting in Malta organised by the Centesimus Annus Pro Pontifice Foundation on financial reform and the common good. It was a meeting that sought to examine the progress being made in the financial sector following the crisis it went through from 2007 onwards, which in turn brought about an international economic recession.
Therefore it is very pertinent to ask if we have had real progress as a result of the changes in the regulatory framework.
The brief answer to this questions is that it is still too early to state whether there has been an element of real change and whether there has been an element of internally driven ethical reconstruction in financial institutions following the crisis. As participants at the meeting said, an audit of the international financial crisis has not yet been undertaken and there is not yet a full understanding of all the consequences of the changes in the regulatory framework in the financial sector.
The long answers require much broader considerations. I am not putting these considerations in any form of priority and so should they be taken as a whole. Nor are these considerations exhaustive.
It is only when financial institutions have earned that social licence that one can truly speak of real change and of an internally-driven, ethical reconstruction
The first consideration is how we look at the human being. The concept of the common good requires us to consider the primary role of the person in the economy. The dignity and the rights of the human person need to be respected and cannot be subjected to economic principles based on efficiency. It is in this context that Pope Francis had stated in no uncertain terms: “No to an economy of exclusion and inequality”. Pope Benedict had stated that: “Man is the source, the focus and the aim of all economic and social life”.
This brings to the forefront the education that is being provided to young people. One very simple example explains it all. Students of economics are taught that there are four factors of production: land, labour, capital and entrepreneurship. They are placed on the same level and at no point is the primary role of the human recognised. He is considered a means to an end – as much as a piece of land or a machine is. As long as this remains so, it is very difficult to think of the human person having a primary role in the economy, and consequently of any real reform in the financial sector.
Having said this, when one meets bankers (and this is not just the experience in Malta), they tell you that they cannot do this or they cannot that because of the new rules of the European Central Bank. So banks are very keen to tick off the boxes designed by the regulators, irrespective of the requirements of their customers. Moreover regulators have not made any serious attempt to avoid the trap of creating a one-size-fits-all solution. For example access to finance by microenterprises across Europe has become more difficult and not less thanks to the new regulations.
Another consideration is the aspect of digitisation in the banking sector and the development of systems that are presenting themselves as alternatives of the banking sector. These alternatives are very often not all regulated. Barriers to entry are minimal. So the so-called traditional banking sector may be disadvantaged in this new scenario. The answer to this may be embracing more technology.
However, is there the risk, that with new technology, relations between customers and banks become less personal? Will bank employees become detached from their customers and the communities they serve? When that happens, no wonder the only reward that such employees value is money.
This brings me to the third consideration. Are we moving towards a more ethical or less ethical way of doing business? Yes, there is more regulation, but is this being reduced to simply ticking off boxes? Is regulation contributing to doing things right or to doing the right thing? Is it more reactive approach or more proactive? I fear that doing things right is more important than doing the right thing and regulation is being reactive than proactive.
This may be happening because there is not yet clarity on the role of the financial sector in the economy and society as a whole. Over the years the financial sector took a life of its own, such that we started to distinguish it from the ‘real economy’.
Financial institutions need to regain the trust they have lost and to achieve this objective they need to actually have and live a social purpose. They do not just need a banking licence to operate but also a ‘social licence’. It is only when financial institutions have earned that social licence that one can truly speak of real change and of an internally-driven, ethical reconstruction.