The Global Financial Crisis has brought to light many of the excesses of our financial and corporate systems. As US banks start to return to profitability and economic forecasters point to signs of recovery, we cannot afford to simply return to business as usual. Every crisis offers opportunity and we should not miss this moment to strengthen our financial system though better, stronger regulation that delivers for all.
The GFC stems directly from an under-regulated system that rewarded risk and short-term opportunism. Quick growth and high returns was king and everyone wanted to be a member of the court. To qualify you had to enter a game of brinkmanship based on trading derivatives of dubious value. The objective was to make sure that no one actually called anyone’s bluff or the whole kingdom would collapse.
Unfortunately, the lack of strong regulators meant there was no one to remind the courtiers that what they were actually gambling with was the livelihoods of many millions of people and that their responsibilities ranged far beyond the immediate thrill of getting those multi million dollar bonuses.
So when the true value of what was being traded was revealed the whole financial system teetered. The interconnection of credit swaps between financiers across the globe meant they were all lined up like dominos. Left little alternative, governments had to intervene and steady the system with tax payer bail outs, guarantees and stimulus packages.
The damage was stemmed but the pain was and still is being felt as hundreds of thousands of innocent people lose their jobs, their houses, their investments.
Now we are being told that there is light at the end of the tunnel. Economists and captains of industry are saying that the worst might be behind us. US banks, such as Goldman Sachs, have miraculously returned to record profits and are now eager to repay the tax payer and get out from under government and regulatory control, yearning to reinstate their massive bonus systems.
In Australia, we have not been immune but we have been lucky enough to dodge the worst impacts of the crisis. There are combinations of factors that have contributed to this luck. The lessons learnt from the collapse of HIH helped us rethink corporate law and prudential regulation. The maintenance of the four pillar policy that has kept our major banks from gobbling each other up. The incredible trading boom with China and the Federal Government’s massive intervention have all helped.
But our financial system is less than perfect. In the finance sector alone, some 20,000 people have lost their jobs and many more live in fear of losing their job as mergers, restructures and offshoring continue.
Competition outside the big four banks has collapsed as a consequence of consumer concern, takeovers and cost of funding differentials.
Credit continues to be squeezed in the business sector and the big banks are readjusting their margins upwards by choosing not to pass on official interest rate cuts or unilaterally announcing increases in their variable home loan rates.
Banking and finance executives continue to be remunerated with massive short term incentives that reward quick returns and drive immediate decisions about growth and cost reduction often at the expense of sustainability.
The culture that is created at the top by such practices then cascades throughout the organisation with employees put under enormous stress to meet sales volumes, very much including the sale of credit. More than 80% of finance sector union members reported that no reduction has occurred in their sales targets despite the economic downturn with a large number actually reporting increased sales targets.
Remuneration schemes constructed in ways that reward or encourage risk taking is one of the factors identified by the G20 Financial Stability Forum as a root cause of the GFC. Yet our banks continue to role out remuneration models based largely on meeting sales volumes.
Despite the GFC, what induced it and common recognition that regulation has been a contributing factor to Australia dodging its worst impacts; we are now hearing a chorus line from the captains of our banking and finance industry warning against stronger regulation.
In an effort to repair the financial system, governments and regulators are meeting at a global level to try and construct new rules that will avoid the excessive risk taking and brinkmanship that led us to the worst crash in over 70 years. But like Goldman Sachs, our finance executives and directors just want the world to go back to what it was and not be subject to a different set of operating conditions that puts common interests ahead of fast money.
We cannot allow this moment in time to be hijacked by people looking to a return to past mistakes. The crisis offers us, as part of a global community, an opportunity to eradicate the practices and incentives for short term decision making and move towards long term, sustainable practices that deliver for all stakeholders.
Finance workers believe it is imperative that our Government not be thrown off course in seeking to regulate the finance industry. We support the call for better regulation of credit, promoting and rewarding professional customer service in our industry and basing financial products on customer needs.
We welcome the inquiry into executive remuneration by the Productivity Commission and the inquiry into remuneration generally in the finance sector by the Australian Prudential Regulation Authority (APRA) and we hope to see a new order that removes the emphasis on short term incentives and risk taking.
We believe there is an opportunity not only to better regulate our finance industry but to develop a plan for the industry to promote its strengths and services to our region of the world. This means investing in Australian jobs and skills and ceasing the practices of job cutting and sending our jobs offshore.
And we encourage some real thinking about what a competitive banking system needs to look like as we emerge from the GFC. We did not support the opportunistic takeovers of our regional banks, St.George and Bankwest, and believe that our industry and consumers are poorer for them. We need to consider measures that will promote genuine competition across our industry while building sustainable jobs and delivering excellence in service.
In return for the tax payer guarantees in this country and for the massive tax payer bail outs in others, our Governments need to bring our finance industry to heel. Forget the inevitable sabre rattling of executives seeking to guard their privileges. The chance cannot be missed to build a sustainable, functional finance system that delivers for all.
Have your say!
Post your comments on our online forum. What should government and the industry do to ensure we don’t miss the opportunity to build a better finance sector? How can we promote genuine competition while building sustainable finance sector jobs?