New York (Thomson Reuters Regulatory Intelligence) - (This article was produced by Thomson Reuters Regulatory Intelligence - bit.ly/TR-RegIntel - initially posted on April 1. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters)
Those old enough to recall the collapse of the Soviet Union will remember how time seemed to accelerate, as established truths toppled like dominoes. Addressing Congress in February 1990, Václav Havel captured the moment: “The human face of the world is changing so rapidly that none of the familiar political speedometers are adequate,” he said, describing a breathless disorientation when he added, “we have literally no time even to be astonished.”
As the COVID-19 pandemic is demonstrating, history sometimes lurches away from the deeply familiar into an ill-formed “new normal.” But it also has a way of lingering, leaving elements of What-had-Been deeply interred – in the earth and the national psyche – to be rediscovered in the course of the Yet-to-Come.
Consider the 1940 image above, warning of an unexploded German bomb found lying beneath London’s Fleet Street. Then consider that on January 12 two World War Two-era bombs were reported to have been discovered in Dortmund, Germany; another, in Venice, was reported on February 2 and just a day later, when yet another bomb was found under Dean Street in London’s Soho. History lurches, true, yet it also lingers...
We are again living through a time of lurching, when “political speedometers” are insufficiently well calibrated to the pace of change. In the face of the current pandemic, and the economic dislocation it has occasioned, we must throw as much money as possible, as quickly as possible, at floundering businesses, entrepreneurs and sole proprietorships, gig economy workers and households in order to create conditions for a swift recovery. To do so, we will be forced to rely on the banking sector to play its critical intermediary role as perhaps never before.(For reference and graphic on the S&P 500 retreat into a bear market compared to past events recorded click:here)
In support, bank regulators worldwide are putting a hold on the introduction of new regulations and delaying normal supervisory and oversight activities: the Basel Committee has pushed the deadline for implementing Basel III standards out by a year; the U.S. Federal Reserve Bank is working to ease rules[here]; the UK’s Prudential Regulatory Authority has cancelled its 2020 stress tests[here]; the Australian Prudential Regulatory Authority has suspend much of its regulatory work through September and the Australian Securities and Investments Commission has suspended its “close and continuous monitoring” program.
In Asia, banks and regulators have benefitted by their experience confronting SARS in the early 2000s, and they have had longer to adjust to the pandemic. Today, banks across the region appear to be in a competition of sorts, aiming to burnish their credentials and social standing.
Others must follow their example. Over a decade after the financial crisis, Banco Santander chair Ana Botín reminds, bankers remain distrusted around the world, contributing to current political populism[here]. The 2008 financial crisis originated in the banking sector – it was the banks that needed saving. But the subsequent “bailouts” bred a lingering resentment, and many still feel that banks first caused the crisis and then benefited at the taxpayer’s expense.
Today’s trials reverse that dynamic: the current pandemic positions banks to reciprocate and to extend themselves on behalf of the taxpayers. But optimism here is unfortunately wanting.
The years since the financial crisis have witnessed countless misconduct scandals, among banks in every major market across the globe. Despite enormous investment in governance, risk and compliance systems, processes and personnel, efforts to manage culture and conduct related risks in the financial sector in the last decade have proven demonstrably inadequate. Throwing more resources at past failed approaches is senseless – perhaps even irresponsible.
Once our present crisis is past, we fear that we will learn of yet more industrywide misconduct, this time taking place as trillions of dollars were steered through the global banking system in order to support taxpayers. Assuredly, some firms will seize upon our current circumstances as a much-needed “redemption moment” for the industry[here]. But this will not insulate good actors from the inevitable social blowback that will result from the bad acts of even a relative few.
In this time of lurching, we must pause to consider what may linger well into the future. Though supervisory scrutiny by regulators may be suspended, rather than viewing this as a “compliance holiday” of sorts, we believe that a doubling down on nonfinancial risk management should be an industry-wide priority. We cannot afford to allow a public health and economic crisis to become a moral crisis as well. History lingers. “If this epidemic results in greater disunity and mistrust among humans,” warns historian Yuval Noah Harari, “it will be the virus’s greatest victory.”[here]
If we fail to address the financial sector’s Achilles Heel[bit.ly/2XBv0f9] – misconduct risk – in the course of what former International Monetary Fund Deputy Director Mohamed El-Erian has termed a race between economics and Covid-19[here&utm_medium=email&utm_campaign=authnote&], a spate of scandals will almost inevitably follow our current heroic efforts. This will rob the financial industry of what little public trust remains to it[here], likely deepening an already worryingly broad discontent with capitalism – and perhaps even with democracy itself.
Policymakers, regulators, supervisors, boards and bank leadership and risk officers should consider this closely if they wish to avoid a future crisis, as pandemic-era bombs explode further on up the road.
Stephen Scott, founder & CEO, Starling; Gary Cohn served as director of the National Economic Council from 2017-18, managing the U.S. regulatory reform and economic policy agenda. Before serving in the White House, he was president and COO of Goldman Sachs. Follow him on Twitter @Gary_D_Cohn; Thomas Curry was U.S. Comptroller of the Currency, the federal agency that charters, regulates, and supervises national banks and federal savings banks; and Martin Wheatley served as inaugural chief executive of the UK Financial Conduct Authority and former CEO of the Hong Kong Securities and Futures Commission
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