“The financial services industry is about relationships, not transactions”

With these words, Professor Paul Dembinski made it clear at the “Finethikon 2012” conference on financial ethics that finance does not live on numbers alone. The founder of the Geneva Observatoire de la Finance was just one of the experts from the worlds of business, academia and politics who gathered at the University of Applied Sciences in Business Administration in Zurich at the end of October. They were there to debate “Trust and Responsibility in Finance”.  One of the sponsors of the event was Liechtenstein wealth manager Kaiser Partner.

The assembled experts all agreed that the financial crisis of 2008 was also a crisis of confidence. This has been reflected in newspaper headlines about speculative losses running into the billions, interest rate manipulation and the lack of independence among client advisors. As a result of all this, the public now has a negative perception of the financial system.

“Too-big-to-fail”

Many of the speakers at Finethikon 2012 thought that the major banks focus too little on providing liquidity for the economy and providing investment advice that genuinely meets people’s needs, and too much on risky transactions. Such transactions have no benefit for the general populace and often create new risks for the system: speculative investments and high frequency trading were mentioned as examples.

According to ex-National Councilor Rudolf Strahm, the big two Swiss banks are so big that in order to protect the whole economic system, the government would have to step in to prevent either of them going bankrupt. To press home his point he quoted the following figures: UBS’s total assets are three times as high as Switzerland’s GDP, and Credit Suisse’s twice as high. By contrast, it would take the total assets of all US banks combined to match the USA’s GDP.  Strahm contends that because people are aware how systemically important this sector is, particularly in Switzerland, they tend to think that any losses are ultimately borne by the general population. Which is why many accuse these banks of taking excessive risks.

Structural deficits and increasing complexity

Thierry Philipponnat, of Finance Watch Brussels, believes that unethical activity in the financial system is also fuelled by structures with no clear responsibilities as well as by structures built on inherent conflicts of interest. Increasing complexity in the system also has a negative effect: hardly any bank clients understand what risks they are actually entering into, said Professor Birger Pridat of the University of Witten/Herdecke. If only a few experts can actually assess the risks correctly, suggested Professor Marc Chesney of Zurich University in a similar vein, they can manipulate them without being detected.

Is regulation the solution?

Business people, academics and politicians alike expressed the view that simpler regulation could reduce complexity and thus create more transparent and more trusting relationships. Bishop, now Archbishop, Justin Welby, who sits in the House of Lords in the UK, called for a radical new start. He believes the financial system is so beleaguered that a whole new set of rules based on ethical principles would be better than a plethora of detailed changes. These rules should be developed in dialog with the regulators. As part of the process of helping build a sensible framework, the financial sector should make an effort to restore trust.

Meanwhile, Professor Falkinger stated that politicians have a duty to curb the proliferation of high-risk products. Similarly Professor Marc Chesney wanted to see restrictions placed on high frequency trading, for example. He also wondered how directives can be at all meaningful if they are supplemented by hundreds of pages of exceptions.

Measures to protect bank clients

Zurich University’s Professor Josef Falkinger said that client advisers should only sell products whose effects and side-effects they completely understand. Conversely, one of the workshops at the conference concluded, financial products should be easy to comprehend, transparent and economically sensible. Savings capital should then be deployed as productively as possible in the real economy.

Professor Marc Chesney called for a redimensioning of derivatives. At the moment only a small portion of derivatives serve to hedge risk; most actually create systemic risk through speculation and arbitrage. Derivates should only account for a small fraction of GDP, but their volume today is actually twelve times GDP. He believes the solution is to introduce a certification process for derivatives. Several experts suggested that investment banking needs to be separated from traditional banking to ensure that customers of large banks don’t have to stump up for the speculative losses incurred by these banks.

Normative components

Despite all these measures, Charles Pictet thought it would be impossible to completely rule out future abuses within the financial system. The former private banker and current FINMA board member believes it is ultimately a question of educating every single individual. The benefit for all is clear: the more pronounced the collective ethic, the better the social cooperation. But Pictet sees a problem here. Switzerland has never managed to “put its own house in order”. Rudolf Strahm also criticized Switzerland’s policies: bankers who for years have demanded banking secrecy now want to send client and adviser data out of the country. Having played a passive role so far in questions of tax transparency, Switzerland now has to accept unconditionally a lot of new rules from abroad.

Dr. Tomas Sedlacek expounded a similar argument. He believes that the economy is not a natural phenomenon but an expression of and part of human culture. A purely mathematical view of economic relationships is not only inadequate, but also risky. Consequently, politicians have to put fundamental conditions in place. Every individual ultimately has to accept that much economic activity carries risks that simply cannot be calculated.

In the current crisis, there are certainly solutions, but none of them are comfortable; which means that if they pursue these solutions properly, politicians risk not being re-elected. So priorities have to be defined. Until now there has been a clear focus on monetary value, but many goods have no price. According to Sedlacek, alternative approaches such as “Gross Happiness Product” are interesting attempts to incorporate non-monetary values as performance yardsticks.

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