Lagarde and Carney let fire at financial sector
Christine Lagarde, the managing director of the International Monetary Fund, has warned that “a fierce industry pushback” by the financial sector is delaying much-needed reforms and risks destabilising the global economy.
Speaking at a London conference on inclusive capitalism, Ms Lagarde said progress on building a safer financial system had been “too slow”, primarily because of industry attempts to halt the introduction of tougher new rules.
She also hit out at continued misconduct in financial services and said the industry had “not changed fundamentally in a number of dimensions since the crisis”, reeling off a list of scandals including money laundering and the manipulation of benchmarks such as Libor.
“Some prominent firms have even been mired in scandals that violate the most basic ethical norms,” said Ms Lagarde.
“While some changes in behaviour are taking place, these are not deep or broad enough. The industry still prizes short-term profit over long-term prudence, today’s bonus over tomorrow’s relationship.”
Her comments were echoed by Mark Carney, the Bank of England governor, who warned that “unbridled faith in financial markets” before the crisis, rising inequality and recent “demonstrations of corruption” had damaged the “social fabric”.
“When combined with the longer-term pressures of globalisation and technology on the basic social contract, an unstable dynamic of declining trust in the financial system and growing exclusivity of capitalism threatens,” said Mr Carney, who was speaking at the same conference as Ms Lagarde.
Their interventions come as policy makers battle to reform finance in the wake of the financial crisis of 2008-9 and to stem a series of scandals that have damaged the industry’s reputation still further.
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Regulators around the globe have imposed about $5.8bn in penalties for attempts to manipulate market benchmark rates. The sum is expected to climb further as regulators conclude their investigations and as the number of private lawsuits rises.
Mr Carney, who also chairs the International Financial Stability Board, said the scandals highlighted “a malaise in corners of finance that must be remedied” and hinted at potential moves to develop principles of fair markets, codes of conduct for specific markets, and “even regulatory obligations within that framework”.
Several banks have pushed back against action by regulators, delaying settlements or refusing to admit wrongdoing. HSBC, JPMorgan and Crédit Agricole resisted claims that they manipulated the Euribor interest rate before they were charged by the European Commission last week.
Jamie Dimon, chief executive of JPMorgan, has been an outspoken critic of tougher regulation, warning that customers would have to pay more for credit or be denied certain financial products as a result. He has also criticised tougher capital rules for being “anti-American”.
Both Mr Carney and Ms Lagarde also said they needed urgently to solve the problem of banks that were seen as “too big to fail”. “This is the year to complete that job,” said Mr Carney, who is in the vanguard of those regulatory efforts in his role at the FSB.
Ms Lagarde said the lack of tools to unwind large banks that cross national borders was a “gaping hole” in the financial architecture that calls for countries to put the global good of financial stability ahead of their parochial concerns.”
Mr Carney highlighted the vast amount of work regulators and central banks were already doing to try to reform the financial system and make it safer. But he added: “Ultimately ... integrity can neither be bought nor regulated. Even with the best possible framework of codes, principles, compensation schemes and market discipline, financiers must constantly challenge themselves to the standards they uphold.”
“It is important to acknowledge the fundamental and far-reaching improvements – both government mandated and industry initiated – that have taken place since 2009 to make the financial services industry more safe, sound and secure,” said Rob Nichols, head of the Financial Services Forum, the trade association for the biggest banks.
“Large banks continue to make improvements with regard to capital, liquidity, activities, and risk management, while working co-operatively with regulators to ensure that the system is strong, more resilient, transparent, and able to promote economic growth.”