Reserve Bank must put bite on rogues
RECENT allegations of currency manipulation by banking staff reinforce the view that herd behaviour is entrenched in the sector.
After all, the same behaviour — untrammelled greed and exponential self-preservation — led to the 2007 financial catastrophe.
The allegations give credence to the view that banks cannot see beyond their profit margins and, left to themselves, will engage in predatory governance and hubrisdriven activities.
Some of these banks were recently penalised for similar offences: Citibank for forex benchmark rigging and Barclays for the Libor scandal. Cynics would be forgiven for saying that either bankers never learn or the supposedly hefty fines imposed on them are an ineffective deterrent.
Since these scandals, global financial regulators have introduced extensive measures to ring in structural change and reregulate the financial sector.
Sadly, these efforts provide only short-lived victories because regulatory agencies such as the Reserve Bank are not proactive.
In any case, there is abundant evidence that, because it does not affect the underlying human conduct, the proscription of illicit behaviour through rules will remain an inadequate deterrent.
Even if a regulatory response were considered optimum, it would still be too costly to regulate for every contingency. Doing so would result in excessive regulation, which would stifle innovation and competition. In any case, the rate at which new financial products are being generated means regulation will never catch up.
Equally daunting is that it is impossible to regulate for morality, ethics and trust, which are desperately needed to augment the credibility of the banking industry.
In spite of that, the Reserve Bank must provide a more muscular supervisory response — or be derided by the public.
In an era in which “capture” is the buzz word, the regulator must demonstrate its independence from the banking industry. Truly hefty fines — for the institutions, rogue traders and their executives — should just be the start.
Unfortunately for the regulatory agency, in an environment in which incentives arising from misconduct outweigh the risks of getting caught, it is unlikely that financial sector rogues will be deterred.
The worst the banks can suffer is a fine — which they can easily afford to pay from their enormous balance sheets. Or simply pass the cost on to customers through interest rates or other charges.
Unlike other offenders, the banks are cloaked in a mystique that shelters them from shame and ostracism. Despite attempts by populist political and civic organisations to taint them, they never really suffer a loss of honour.
Under this cloak, banks galvanise governments to bail them out of their self-generated calamities on the basis that they are too interconnected, systemically important and big to fail.
Political condemnation of the banks smacks of hypocrisy. Politicians must be seen to back the public, but dare not frustrate the codependent relationship in which politicians think they “own” the banks and banks think they “own” the government.
However, the lessons from this scandal should not be wasted. Besides exposing the fundamental flaws in meta- or self-regulation, it provides an opportunity to revisit the way foreign-owned banks and financial conglomerates are regulated and supervised in South Africa. How this will be resolved will have important implications for the design of policy under the proposed twin peaks regulatory and supervisory architecture.
New structures are crucial. However, for such structures to be effective they must engender a new culture and be supported by effective enforcement.
Kawadza is a lecturer in banking and finance law at the University of the Witwatersrand