ANDREW HALDANE: How do markets build a social licence? The Old Lady opens debate on socially useful finance

By Andrew Haldane, Bank Of England Chief Economist, For Daily Mail

Published: 19:02 EST, 21 September 2015 | Updated: 19:02 EST, 21 September 2015

View
comments

'Socially useful banking': Andrew Haldane, chief economist at the Bank of England

Four years ago, thousands came from far and wide to make themselves heard by New York’s financiers.

Occupy demonstrations spread from Wall Street to well beyond. In London, protesters camped outside St Paul’s.

A tide of public anger had risen throughout the global financial crisis and crashed onto the City’s shores as the damage to the world economy became painfully clear.

Finance was imperilling, not serving, the people. The overhaul of banking – driven by tough regulations and lost reputations – is widely debated. The many changes to financial markets, much less so.

So I invite you to join us in the Guildhall, down the road from St Paul’s. The event, on November 11, is the Open Forum: Building Real Markets for the Good of the People.

Governor Mark Carney and I will bring together all stakeholders to map a positive future for financial markets.

This brings back memories for me. Soon after Occupy took centre stage, I spoke at an event organised by Occupy Economics. Our topic? Socially useful banking.

I recalled how, as debt spiralled throughout the nineties and noughties, so had banks’ profits and pay.

This heady vortex, sucking in resources and talent from other sectors, got out of control. When property and other asset prices reversed, and banks collapsed, the taxpayer picked up the bill. It is obvious in hindsight how distorted the relationship between banking and the economy had become.

Our efforts to repair this relationship came down to one idea. Banking is a servant of the economy, not its master. Keeping your money safe. Lending to support those trying to get onto the housing ladder. Financing of businesses, large and small. Efficient and effective payment services.

These activities are essential for the prosperity of your family and our country. They are rights, not privileges. They must be resilient and reliable. So policymakers are requiring banks’ balance sheets to be ten times stronger than pre-crisis.

Banking on change: Markets must work in the interests of the people they serve, says Andrew Haldane

We are ring-fencing retail and investment banking, keeping your deposits at a safe distance from more speculative activities. And so on.

Banking is, however, just one part of the story.

The UK financial system is more than just banks. The ‘non-bank’ financial system – comprising pension funds, insurance companies and others – is already around six times the size of our economy and on current trends could rise to nearly 15 times by 2050.

There will be a pivot to ‘market based finance’: people and businesses looking beyond banks to other financial intermediaries to fund the investment crucial to economic growth. This underlines the importance – particularly to the UK, home of international finance – of the fixed income, currency and commodity (FICC) markets in which these intermediaries operate.

These markets can, and should, be powerful drivers of prosperity. They determine the exchange rates when we travel or buy goods from overseas, and the costs of our food and raw materials. And they help companies manage the financial risks of investing, producing and trading.

But these markets can go wrong. The Libor and foreign exchange scandals, among others, reflected a culture of ‘ethical drift’. Benchmarks were manipulated and rules violated without a care for the wider consequences. And companies who rely on stable and predictable funding were left high and dry at the faintest whiff of contagion or volatility within the markets.

Future of financial markets: Bank of England Governor Mark Carney and Andrew Haldane will be at Open Forum: Building Real Markets for the Good of the People on 11 November

Once again, firms and policymakers are getting on with the repairs. Misbehaviour took hold in grey areas; the new FICC Market Standards Board being set up by industry will shine a light on those. Much of the foreign exchange market was unregulated; that is about to change.

Markets were too opaque; greater transparency will help bring confidence. The Bank’s own operations in financial markets were too conservative; a modernised ‘lender of last resort’ will help bring resilience.

But, inevitably, this is work in progress. More is needed to change, durably, the culture of finance and the functioning of markets. Restoring society’s trust is not a nice-to-have, it is a must-have.

So now is a good time to take a step back. Are markets delivering for the economy? Are the regulatory changes coherent? How should we interpret recent episodes where markets suddenly gum up amid worries about Greece or China? Will financial innovation and technology be game-changers?

And most importantly of all, if we are truly to learn the lessons of the banking crisis: how do markets build a social licence? They must work in the interests of the people they serve. Innovation and regulation cannot shape the future for financial markets without society’s consent.

So the Open Forum is not just for policymakers and market participants. We are looking beyond finance to customers, corporates, small and medium-sized enterprises, academics, trade unions and civil society. Admission to the Open Forum is free: you can nominate to attend from 9am today at boeopenforum.co.uk.

And join the debate on Twitter – #BoEOpenForum.

Financial markets matter to everyone. It is time to make yourself heard.

Andrew Haldane is Chief Economist at the Bank of England