Trust
Reblogged from a very interesting Stubborn Mule on 12 August 2012 · 9 comments
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During the week I attended a farewell function for a retiring colleague. The turnout was impressive, a sign of deep respect earned over a career at the bank spanning more than forty years. In the speeches, a recurring theme was trust.
The primary business of a bank is lending money, which exposes the bank to credit risk, the risk that a borrower will be unable to repay the loan. On more than one occasion, our retiring colleague had turned down a loan based on prior bad experiences with the prospective borrower. Why would you lend money to someone who has lied in the past? Learning from past betrayals of trust proved time and again to be a wise risk management strategy.
In Trust: The Social Virtues and The Creation of Prosperity, Francis Fukuyama argues that trust has played a crucial role in the development of capitalism. While some point to the role of the rule of law for enforcing contracts in enabling business, Fukuyama emphasises that legal recourse only serves as a last resort. More important is the simple confidence of a handshake: the confidence that those you do business with will live up to their end of the bargain. Those societies which developed mechanisms for extending trust beyond small networks of families and friends were rewarded with greater economic success.
If trust is important for business, it is particularly so for banking. But, scanning the financial headlines over the last few months shows a banking system apparently intent on destroying society’s trust in banks and bankers.
Serious Fraud Office investigating the rigging of LIBOR rates
Barclays is just the first bank to be fined for allowing traders to manipulate the LIBOR interest rate benchmark. The scandal cost chief executive Bob Diamond his job and this story will be back in the headlines as the findings extend to other banks and civil cases unfold.
HSBC accused of providing a conduit for “drug kingpins and rogue nations”
Before a US Senate hearing, HSBC’s head of compliance faced charges that the bank had acted as knowing banker to Mexican drug cartels. He acknowledged that “there have been some significant areas of failure” and resigned his position there and then.
Standard Chartered alleged to have “schemed” with Iran to launder money
The BBC article in the link above is coy in its language. The New York Department of Financial Services is a little less so. Page 5 of their report quotes a Standard Chartered executive as saying, “You f—ing Americans. Who are you to tell us, the rest of the world, that we‟re not going to deal with Iranians?”
The front page of the Economist epitomises where this has led.
The worldwide reputation of bankers is at its lowest point, in my lifetime at least. The result will be new and more stringent regulation and more intrusive oversight of banks by regulators. This outcome will be well-deserved as banks have proved themselves unworthy of the trust of their communities. However, it is also likely to keep borrowing costs and transaction fees high as banks struggle to deliver shareholder returns while covering the costs of new regulatory requirements. So, it will not just be banks bearing the cost of their misdeeds.
Trust is hard to earn and, once lost, harder to recover. Every bank around the world should be thinking very hard right now about how to restore trust in banks.
Many thanks to our Friends at Stubborn Mule
In a world which practices a truly Macchiavellian form of ‘realpolitik’, who can trust anybody? Is it any wonder that everything seems to be falling apart? (Or is that just me?)
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No, everything is not falling apart. But hearing Abbott and co. say that same thing so often and it being repeated by his followers on blogs tends to be so depressing you do feel like that, somewhat. A lot is a state of mind and a sloppy world wide media.
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I know you’re right Vivienne… but my state right now is very depressed… but it’s not helped by sloppy world-wide media, that’s for sure!
😐
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Read John Ralston Saul’s essay in this weekend’s SMH and weep.
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History repeating itself. US bankers were charged for laundering Nazi money during WWII, now, their descendents are bankers, oil magnates, even one US president!
Then again, Australia isn’t immune…something about wheat.
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Not only that, Big M… What do you think happened to all those top Nazi scientists after the war? Yep! ‘Sright! The good ol’ US of A took ’em in and gave ’em highly paid jobs with NASA and the military… (why waste perfectly good evil geniuses, eh?)
😉
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Well, they were rocket scientists, after all!
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Following on from this I had an interesting exchange with Jane Rygaard from Nokia Siemens Networks . Now given her employer Rygaard can clearly be expected to be a little carrier-centric but it was interesting to hear her contention that it is more likely to be carriers rather than Apple or Google who is likely to be the strong players in a Banking 2.0 world. One of the reasons that Rygaard believed carriers will be the king makers going forwards is potential concerns that consumers have around the privacy of their financial data. This view is one shared with various banking people I’ve been talking to lately who also suggest that Banks sit on a far higher level of the trust spectrum than do companies like Google and Apple – at least in consumers minds. Rygaard pointed out a study they commissioned in 2010 that found that telecoms operators were seen as the second most trusted group, after banks, for securing personal information.
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