This issue of Moral Cents devotes three articles to discussions about financial regulation – its origination, its purpose and its impact.
The first essay by Shazia Khan Afghan describes the new conduct rules for financial institutions in the UK. While it appears as if the period of financial reform and regulation generation in the US is coming to a close, as memories of the Global Financial Crisis (GFC) fade and markets race to new heights, the situation is different in the UK. The Financial Conduct Authority and Prudential Regulation Authority issued rules to hold financial professionals at senior and all other levels in banks to appropriate standards of conduct. Through the Senior Managers’ Regime and Certification Regime, UK regulators intend to improve the culture, governance and accountability within banks and other relevant firms. The author describes in detail these new Regimes and Conduct Rules, with insightful analysis on their fairness and efficacy.
The second article by Cristina van Putten argues that the purpose of three major pieces of post-crisis financial regulation, Volcker in the US, Vickers in the UK and Liikanen in EU, is to alter the structure of banking. By prohibiting speculative trading, the regulations aim to refocus banks on providing socially useful services and turn them away from what Lord Adair Turner termed, socially useless activities. These rules do not just deal with technical details of banking but are actually shifting the structural model of banking.
The third article by Malte Nussberger makes the argument that the impact of the Too Big To Fail (TBTF) designation on banks actually encourages rather than discourages risk taking. Financial intermediaries have the incentive to externalize their exposure by growing big, complex and interconnected. With the TBTF label, banks know that governments and central banks will prevent a bank’s possible insolvency. Bankers therefore, take this probability of a bail out into their risk calculations.
Carolina Rocha’s article moves the reader from banking regulation to a broader view of the economy. She proposes a vital role for the private sector in reimaging capitalism, an economic system she argues has lost the moral moorings envisioned by Adam Smith. Rather than the public sector taking a dominant role in reinvigorating the ethical side of capitalism, the private sector is well suited to restore lost virtues.
Perhaps the method of measuring of economic growth is one reason for the loss of moral moorings in capitalism. Instead of Gross Domestic Product (GDP) that merely considers goods and services output we also should use the measure of Gross National Happiness (GNH) to supplement our data. Haoqian Chen looks into GNH as used in Bhutan (hence our Journal cover for this issue), evaluating its usefulness and limitations. As the prior issue of Moral Cents ended with an article on Buddhist ethics in finance, consider this final article a continuation of our exploration into Buddhism based economics.
Dr. Kara Tan Bhala
Moral Cents: The Journal of Ethics in Finance is published by
Seven Pillars Institute for Global Finance and Ethics
Cover: The Haa Valley of Western Bhutan (wikipedia)