Lehman Brothers anniversary: A philosopher’s view on avoiding another financial crash

It’s 10 years since the collapse of Lehman Brothers (15 Sept 2008) and the ensuing financial crisis still haunts us today. But how many lessons have been learned? Here, Professor Emma Borg makes the case for a social licence for banks that could make for a more financially stable future for everyone.

The Lehman Brothers collapse triggered a financial crash in 2008

George Santayana said “Those who cannot remember the past are condemned to repeat it” and, with the 10-year anniversary of the Lehman Brothers collapse upon us, now is the time to reflect on the global financial crash and ask just how likely those events are to repeat themselves.

On the one hand, we have learnt some important lessons from the crash and taken appropriate steps to make any recurrence less likely:

  • New regulation has placed more stringent capital requirements on banks and reformed the remuneration structure around bonuses.
  • In the UK, banks have been required to hive off riskier investment arms from lower-risk, more mundane banking activities.
  • In the US, the 2010 Dodd-Frank Act limited the ability of big banks to undertake proprietary trading.
  • The UK has also seen the introduction of the Senior Managers and Certification Regime (SMCR, March 2016), which has served to increase the accountability of senior staff in the financial services industry. Senior managers cannot delegate overall responsibility for the conduct of their staff.
  • Regulators seem to be getting serious about individual responsibility in the sector: in January 2019 the case against four senior staff from Barclays will finally reach trial.

On the other hand, though, the current state of play in global financial markets is enough to cause significant unease:

  • Levels of personal debt – a major factor in the housing crash – have been creeping back up and, according to a recent report by the Office for National Statistics, in the UK is now back up to levels not seen since the 1980s.
  • Shares in the US have repeatedly hit new highs, leading some to warn that financial markets today look rather worryingly like they did just before the crash
  • Evidence of misbehaviour in the sector continues to surface with worrying regularity, from scandals around mis-selling to colluding to fix the LIBOR inter-bank lending rate.

So what more could and should we do to prevent another global financial crisis?

Fines should not be the end of the story

Imposing ever-increasing levels of financial penalty as the primary sanction for serious misbehaviour does not seem to be working. At a time when public trust in financial institutions is already very low, fines are increasingly seen as part of the cost of doing business. The money disappears into Treasury coffers and business apparently goes on as before.

An alternative model would be to make the fine only half the story, with making the fine work providing the closing chapters. We should have a public debate about what relevant work might be underpinned by the ‘windfall’ of these fines. For example:

  • Firms could be required to pay for remedial exercises where staff are encouraged and enabled to reflect on the regulatory rules in place, exploring the reasons those rules exist and assessing the true cost to society of flouting them.
  • Or we might ring-fence the money to help to provide basic financial education and impartial financial advice to the poorest sectors of society, in order to ensure that financial knowledge and understanding are improved in society at large.
  • Public trust in financial institutions might improve if the money raised from fines was used directly to improve the way in which banks and other large financial institutions met their social responsibilities.

A social licence for banks

Banks, like other corporations, benefit from a range of social goods (including things like access to a well-educated workforce and a properly functioning health system, the protections of a legal system, proper transport links, etc) Furthermore, banks enjoy additional benefits; they are granted licences to take and hold deposits, and, in some circumstances, the state steps in as lender as a last resort.

This social support should serve to generate a social licence under which banks (and indeed other corporations) operate. These social licences governing corporations would then place constraints on their activity, for instance, a social licence might require that firms should not act in such a way as to aggressively minimise their tax liabilities, but rather should accept that they need to make reasonable contributions to the income from taxation of the societies in which they operate.

Against this, opponents might point out that pursuit of shareholder value as the primary objective of corporations is written in to law, so that corporations have no choice but to pursue profit above all else. However, legislative frameworks do recognise the existence of secondary duties in line with what I am here terming a ‘social licence’ (see, for instance, Section 172 of the UK Companies Act 2006). One way to create substantial change would be to develop the idea of social licences and have regulators require firms to act in accordance with the conditions they impose.

— Emma Borg is Professor of Philosophy at the University of Reading and Director of the Reading Centre for Cognition Research. She is also an Associate Fellow on the British Academy ‘Future of the Corporation’ programme and co-author of ‘Epistemic virtues vs. ethical values in the financial services sector’, Journal of Business Ethics 2017.

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