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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 Markets Non-financial Goods, services, labor Slow, institutionally closed, price control Fast, open, price sensitive, transparent Expanding: commodities real estate, art, ships,… Extensively regulated Extensively regulated Politically not challenged Politically sensitive Rollercoaster Slow 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.