Name Does society have a role to play in conduct costs?Date 2013-12-28 00:00:00 +0000Text
LLB Law Final Year Undergraduate
Too often we hear about moves to reset the banking system, introduction of new regulatory mechanisms to banks’ risk management structures, etc. But can regulation really surpass the risks that banks and banking activities inherently possess and ‘prevent’ the next financial crisis? Or is regulation merely a theoretical myth to make us believe that banks can be safe and ethical?
The publication of the Conduct Cost Project’s findings throws light on the cost of banking misconduct. Making this information public has the effect of educating the public, making us more aware of banking behaviours, and question the concept of sustainability in banks more generally. Can we expect these costs to decrease if banks became more ethical? To assert this is to assume that banks can alter their ethical culture, or that there exists one already. It has repeatedly been suggested that the failure of the banking culture is, in fact, a broader social phenomenon, in that the societal values we believe in and thus promote, explicitly or implicitly, fuelled the gradual fall or innately low ethical standards of banks. To expand, it may be reasonably argued that insofar as society pinpoints profit maximisation as a goal for firms and corporations, their ethical culture will not change and conduct costs will perpetually be incurred.
Risks and benefits often come hand in hand, whether the risks will outweigh the benefits attainable has declined in importance in the decision-making process of banks. Combination of various incentives and guarantee of security (i.e. government bail-outs) has been exploited in that banking, hedging and other speculations had merged into the sole purpose of profit maximisation where taking unreasonable and unjustifiable risks and surpassing competitors has become more important than sustaining long term financial health. And it is these incentives which encourage manipulation and short-termism, blinding the ideal of ethical sustainability. As mentioned briefly above, insofar as the government, a reflection of popular will at large, is willing to bail out banks, there will be nothing to lose in the eyes of the banks. If anything, it can be interpreted as encouragement to partake in high-risk and illegal activities.
Whilst the publication of these results has led us to question banks’ risk management systems, and whether our banks are really as safe as we once perceived them to be, it also brought to surface the underlying paradox of the broader societal failure. Effectively, society is breeding this profit-maximisation culture. Supposed regulation and government bail-outs are evidently in direct tension with one another. The effect of the publication of these results is yet to be seen, the big question is whether the comparative element will exert pressure for banks to enter into a ‘race to the bottom’, and just how much is tolerated by the society at large.
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