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Further On Up the Road

by Thomas Curry, Martin Wheatley, Gary Cohn, Stephen Scott

This is an Out-take from our 2020 Compendium

Those old enough to recall the collapse of the Soviet Union will remember how time seemed to accelerate, as established truths toppled like dominoes. Addressing Congress in February 19901, Václav Havel captured the moment: “The human face of the world is changing so rapidly that none of the familiar political speedometers are adequate,” he said, describing a breathless disorientation when he added, “we have literally no time even to be astonished.”

History sometimes lurches away from the deeply familiar into an ill-formed “new normal.” But it also has a way of lingering, leaving elements of What- had-Been deeply interred—in the earth and the national psyche—to be rediscovered in the course of the Yet-to-Come.

Consider the 1940 image above, warning of an unexploded German bomb found lying beneath London’s Fleet Street. Then consider this story2 of WWII-era bombs found in Dortmund—reported on January 12th of this year. Or this story,3 from February 2nd, when another bomb was found in Venice. Or this one,4 appearing just a day later, when yet another bomb was found under Dean Street in London’s Soho. History lurches, true, yet it also lingers...

We are again living through a time of lurching, when “political speedometers” are insufficiently well calibrated to the pace of change.

In the face of the current pandemic, and the economic dislocation it has occasioned, we must throw as much money as possible, as quickly as possible, at floundering businesses, entrepreneurs and sole proprietorships, gig economy workers and households in order to create conditions for a swift recovery. To do so, we will be forced to rely on the banking sector to play its critical intermediary role5 as perhaps never before.

In support, bank regulators worldwide are putting a hold on the introduction of new regulations and delaying normal supervisory and oversight activities: the Basel Committee has pushed the deadline for implementing Basel III standards out by a year; the US Federal Reserve Bank is working to ease rules;6 the UK’s Prudential Regulatory Authority
has cancelled its 2020 stress tests;7 the Australian Prudential Regulation Authority has suspended much of its regulatory work through September8 and the Australian Securities and Investments Commission has suspended its “close and continuous monitoring” program.

In Asia, banks and regulators have benefitted by their experience confronting SARS in the early 2000s, and they have had longer to adjust to the pandemic. Today, banks across the region appear to be in a competition of sorts, aiming to burnish their credentials and social standing.

Others must follow their example. Over a decade after the Financial Crisis, Banco Santander chair Ana Botín reminds, bankers remain distrusted9 around the world, contributing to current political populism. The 2008 Financial Crisis originated in the banking sector—it was the banks that needed saving. But the subsequent “bailouts” bred a lingering resentment,10 and many still feel that banks first caused the crisis and then benefited at the taxpayer’s expense.

Today’s trials reverse that dynamic: the current pandemic positions banks to reciprocate and to extend themselves on behalf of the taxpayers. But optimism here is unfortunately wanting.

The years since the Financial Crisis have witnessed countless misconduct scandals, among banks in every major market across the globe. Despite enormous investment in governance, risk and compliance systems, processes and personnel, efforts to manage culture and conduct related risks in the financial sector in the last decade have proven demonstrably inadequate. Throwing more resources at past failed approaches is senseless—perhaps even irresponsible.

Once our present crisis is past, we fear that we will learn of yet more industrywide misconduct, this time taking place as trillions of dollars were steered through the global banking system in order to support taxpayers. Assuredly, some firms will seize upon our current circumstances as a much-needed “redemption moment11 for the industry. But this will not insulate good actors from the inevitable social blowback that will result from the bad acts of even a relative few.

“What struck me when the manipulation was made public was how much it angered people,” one of us observed12 a few years after the Financial Crisis, when the LIBOR rate-rigging scandal broke into public view. “It said something about the culture of financial services, but also led people to question what they can rely on.”

In this time of lurching, we must pause to consider what may linger well into the future.

Though supervisory scrutiny by regulators may be suspended, rather than viewing this as a “compliance holiday” of sorts, we believe that a doubling down on nonfinancial risk management should be an industry-wide priority. We cannot afford to allow a public health and economic crisis to become a moral crisis as well.

History lingers. “If this epidemic results in greater disunity and mistrust among humans,” warns Yuval Noah Harari,13 “it will be the virus’s greatest victory.”

If we fail to address the financial sector’s Achilles' Heel14—misconduct risk—in the course of what Mohamed El-Erian has termed a race between economics and COVID-19,15 a spate of scandals will almost inevitably follow our current heroic efforts. This will rob the financial industry of what little public trust16 remains to it, likely deepening an already worryingly broad discontent with capitalism—and perhaps even with democracy itself.

Policymakers, regulators, supervisors, boards and bank leadership and risk officers should consider this closely if they wish to avoid a future crisis, as pandemic-era bombs explode further on up the road.

 

A version of this article was published by Thomson Reuters Regulator Intelligence on April 1st, 2020 and again, on April 13th, Here.17

 

About Starling
 

A globally recognized RegTech pioneer, Starling is an applied behavioral sciences company that helps customers to create, preserve, and restore value. Combining machine learning and network science, Starling’s Predictive Behavioral Analytics platform allows managers to anticipate the behavior of employees and teams, and to shape it proactively. Starling reveals how relational trust dynamics within an organization impact business performance— predictably. Its proprietary algorithms generate actionable insights that allow leaders to optimize performance and to identify and mitigate culture and conduct related risks before they cascade into crises.

Starling is guided by a Scientific & Academic Advisory Board that includes John Seely Brown (former director of the Xerox PARC Research Lab), Nicholas Christakis (director of Yale’s Human Nature Lab), Karen Cook

(director of Stanford’s Institute for Research in the Social Sciences), and Thomas Malone (director of MIT’s Center for Collective Intelligence).

With Tom Curry and Martin Wheatley, Rick Ketchum, the former CEO of the Financial Industry Regulatory Authority (FINRA), also serves on Starling’s board of Senior Regulatory Advisors.

With Gary Cohn, Starling’s Risk & Governance Advisory team also includes Siew Kai Choy, former Managing Director of GIC Private Limited (Singapore’s sovereign wealth fund), where he served as head of Enterprise Data & Analytics and founded GIC Innovation Labs, and Mark Cooke, Chairman of O.R.X. – the industry association of heads of operational risk among 100 of the world’s leading financial institutions, and past Global Head of Operational Risk Management for HSBC.

 

Starling author

THOMAS CURRY was appointed by Barak Obama to serve as Comptroller of the Currency, the U.S. agency that regulates and supervises national banks. He is a Senior Regulatory Advisor to Starling.

Starling author

MARTIN WHEATLEY was the inaugural CEO of the U.K. Financial Conduct Authority. Previously, he served as CEO of the Hong Kong Securities and Futures Commission and spent 18 years with the London Stock Exchange, six serving on its Board. He serves on the Regulatory Advisory Board of Starling.

Starling author

GARY COHN is Vice Chairman of IBM, was President and COO of Goldman Sachs, and served as Director of the National Economic Council in the White House. He leads the Risk & Governance Advisory Board at Starling.

Starling author

STEPHEN SCOTT is a risk management expert and CEO of Starling, a globally recognized leader in the RegTech space. Operating at the nexus of data science, network science, and behavioral science, Starling's Predictive Behavioral Analytics tools are used by leading financial services firms to assess and mitigate culture and conduct related risks.

Endnotes

1  Vaclav Havel, Speech to the U.S. Congress, Feb. 22, 1990.

2  "Mass Evacuation Underway in German City Over WWII Bombs," Bloomberg, Jan. 12, 2020.

3  "Venice shuts down to defuse unexploded WW2 bomb," RFI, Feb. 2, 2020

4  Rob Picheta, "Unexploded World War II bomb found in central London prompts evacuations," CNN, Feb. 3, 2020.

5  Stephen Scott, "Now More than Ever: The Need for Reliable Conduct Risk Metrics," Regulation Asia, Mar. 21, 2020.

6  Robert Freedman, "Regulators weigh easing more bank rules as markets stay jittery," Banking Dive, Mar. 18, 2020.

7  "Bank of England announces supervisory and prudential policy measures to address the challenges of Covid-19," Bank of England, Mar. 20, 2020

8  Michael Roddan, "APRA, ASIC drop regulatory programs to focus on coronavirus," The Australian, Mar. 23, 2020.

9  "Santander's Botin says distrust of bankers still fuels populism," American Banker, Nov. 5, 2019.

10  Greg Ip and Jacob M. Schlesinger, "Spend Generously, Take Care of Workers: Coronavirus Stimulus Takes Lessons From TARP," The Wall Street Journal, Mar. 26, 2020.

11  James Frost and James Eyers, "Banks to be tested in 'redemption moment," Financial Review, Mar. 30, 2020.

12  Martin Wheatley, "Pushing the Reset Button on LIBOR - Speech By Martin Wheatley - Managing Director, FSA, And CEO Designate, FCA at the Wheatley Review of LIBOR," Mondo Visione, Sept. 28, 2012.

13  Yuval Noah Harari, " In the Battle Against Coronavirus, Humanity Lacks Leadership," Time, Mar. 15, 2020.

14  Thomas J. Curry, "Remarks Before the ABA Risk Management Forum," Orlando, FL, Apr. 10, 2014.

15  Mohamed A. El-Erian, "The Race Between Economics and COVID-19," Project Syndicate, Mar. 26, 2020.

16  Mary Mazzoni, "Americans Trust Banks Less Than Ever: This CEO Offers a Fix," Triple Pundit, Feb. 19, 2019.

17  Gary Cohn, et al., "COVID019: v the road," Reuters, Apr. 13, 2020.