There are at least four ways of holding someone to account; through the market; through democratic means; through law; or through peer censure (including family). Each can be applied to bankers embroiled in the crisis that we are in. Starting from the perspective that those responsible for events should be held accountable for them (which seems fair enough to me, and I’m sure to most people), then what can this kind of analysis show us?
Holding bankers to account through the market means letting insolvent banks fail, and encouraging consumers to move their accounts to banks that they believe are and have behaved responsibly. However, we haven’t let insolvent banks fail for fear of systemic failure of the banking system, and the extent to which most bank customers understand whether or not their banks have been responsible is probably questionable. This doesn’t mean that this system can’t work – banks can be allowed to fail, and customers can get better educated about their financial choices. But neither seems to be happening right now, which does ask questions about whether banks are being held to account through market choices.
Holding banks to account through democracy means working out a regulatory regime through open public debate (which could be minimal or very extensive, depending on the country involved), and making sure that public regulation system works through government scrutiny of it. I’m not particularly hopeful, again, that either is the case. I’m not sure there’s a great deal of public debate or understanding about banks, never mind how to regulate them. This might not matter if our elected politicians understood them, and could offer us worked out alternative schemes that we could debate and vote for, but that doesn’t seem to be the case either. The US and UK scrutiny of banking leaders often seemed more like public showboating than any attempt to understand what happened and to act appropriately. There are also substantial problems around banking regulation and government involvement including regulatory capture (especially when significant politicians often seem to leave politics and join banks), and through banks funding political parties and even individual politicians. Rather depressingly for those of us that want democracy to work better, it doesn’t seem to be working in relation to banks – something that is even more alarming now that the state has nationalised some of them.
Holding banks to account through law would mean either the state or private individuals taking legal action where they believe that bankers have acted illegally. There are certainly cases in the nineteen century where banking collapses were followed by widespread lawsuits, and I’m sure there are lawyers on both sides of the Atlantic looking for possible angles for filing law suits now. Suing bankers to hold them to account has an immediate appeal – justice is linked to law in lots of people’s minds, and it would mean that bankers or fraudulent mortgage brokers are held to account even when they have moved on to other firms. They wouldn’t be able to evade responsibility for their actions by moving onto another job. However, doing things through the law is incredibly slow, extremely expensive, and doesn’t deal with the problem that most of practices that led to the financial crisis were probably legal, even if they weren’t terribly ethical on many occasions, and may not have made a great deal of sense when viewed with the benefit of hindsight. The law can’t protect us from practices that are legal, but unethical, or just unprofessional. However, that doesn’t mean that we shouldn’t use the law from time to time to remind those in positions of responsibility, either inside or outside the financial sector, that they have to work within the law.
That takes us to the fourth option – holding banks to accountability through peer censure. I think this asks an interesting question. Is banking like professions like medicine? In many respects it is. We trust bankers to do things that we don’t really understand ourselves (creating what are often called principal-agent relationships where a party acts on our behalf). This is because bankers have (or are supposed to have) expertise in what they do. Now we wouldn’t trust a surgeon to operate on us if they hadn’t passed their medical exams and weren’t a registered doctor. So I wonder whether we should be trusting banker with our money, and in many respects with our financial future, if they aren’t qualified and accredited to deal with it. Bankers often argue that they should be self-regulating, but it’s hard to see how they can be self-regulating unless they are able to operate censure for those that choose to operate within the law, but unprofessionally and unethically. Banking is special – it isn’t just another business – because bankers can create money. That’s a significant responsibility, that at present, doesn’t seem to come with too much accountability in return. If other systems of accountability aren’t working terribly well, then perhaps we need to try something new.
Holding bankers to account through peer censure would mean treating it as a profession. It would mean that other bankers (and lay members) would be able to decide whether bankers about whom there were complaints or concerns should be allowed to continue to practice as a banker or not. If they are not, then they would have their licence to be a banker effectively removed. In turn, banks would not be allowed to employ those people in any kind of banking role. Banks themselves would be responsible for drawing up clear standard which they expected their members to operate within, and would be able to move closer to a self-regulation model as there would be clear penalties for bankers behaving unprofessionally – they would lose their livelihood. The medical profession manages to make this kind of system work at least moderately well.
Maybe it’s time to take bankers at their word in terms of self-regulation, but make them take full accountability for the remarkable profits and earnings they are able to make during the good economic times through a system that defines, amongst themselves, which practices are acceptable and which are not, and which clearly censures those that step outside the limits. This might also help consumers in making judgements about who they wish to trust their money with – if given a choice between an accredited banker and an unaccredited one, I know who I’m going to trust.