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Banking in Crisis
towards a Responsible
Luc Van Liedekerke
Center for Economics and Ethics
• 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
No significant banking
Financial versus non-financial
Financial Markets
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
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
– Price swings in stockmarkets create wealth
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
The responsible organisation
Functional differentiation
• Growing complexity of the organisation
demands functional differentiation
• Reduction of responsibility to role
• 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)
• How to stop the rollercoaster?
• A new regulatory structure beyond national
• 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.