Banking in Crisis towards a Responsible Organisation Luc Van Liedekerke Center for Economics and Ethics KULeuven

Content Macro-economic remarks Towards a responsible organization The future of banking

Macro-Economic Remarks Fragility of the banking system Regulatory arbitrage

It worked for 60 years and now it is broken… Impressive number of banking (and financial) crises in the last 20 years ( Jean-Charles ROCHET November 2000) Among IMF member countries: approximately 130 out of 180 have experienced crises or serious banking problems Cost of Savings and Loans debacle in the USA (late 1980s) > loss of all failed US banks during Great Depression (Calomiris, 1999) Average cost of recent banking crises per country: ~ 12 % GDP (but more than 40 % in the more recent episodes: Argentina, Indonesia, Korea, Malaysia).

Banking crisis Significant banking problems No significant banking problems/Insufficient information

Financial versus non-financial markets Financial MarketsNon-financial Goods, services, labor Fast, open, price sensitive, transparent Slow, institutionally closed, price control Expanding: commodities real estate, art, ships,… Extensively regulated Politically not challenged Extensively regulated Politically sensitive RollercoasterSlow moving prices

Transmission mechanisms Not self-evident, a few obvious examples –Commodities rollercoaster and planning for the future –Interest rate, commodity and currency bubbles hinder the planning horizon of business –Price swings in stockmarkets create wealth effects

Regulatory arbitrage Basle 1capital standards lead to regulatory arbitrage and the expansion of the interbank market Regulatory avoidance through off-balance vehicles, shadow banks, etc. resulted in further credit expansion Basle 2 dragged on Regulation was massively mis-used

Why were some more hit than others? The responsible organisation

Functional differentiation Growing complexity of the organisation demands functional differentiation Reduction of responsibility to role responsibility Reward system increase focus on narrow role (puppet on a string) HR techniques (job rotation, etc. ) limit willingness to take on responsibility

Benchmarking replaces the focus not on the problem at hand but on the behaviour of others Who sees the full picture? Who has sufficient knowledge to judge the full picture?

The future of banking Real impact of the financial system Regulatory reform and overshooting Voice in an open culture

Financial markets and growth Large financial sector is linked to growth (developing countries: private financial sector doubles in size cause the economy to grow by 2% ) Narrow banking limits risk but will cost growth, certainly in emerging economies Derivatives were part of the problem, but can bring security and benefit (Mexico, 1989, 1990)

Challenges How to stop the rollercoaster? A new regulatory structure beyond national borders Build a responsible organization, banks as well as regulators

Voice in an open culture Give room for an extended notion of responsibility in the organisation Demands a different organisational culture Make room for voice (moral muteness) At the top (corporate governance culture) and at the bottom. Even the smallest function demands professionalism.