In an era of 24/7 media transmission, commonplace topics like the importance of trust and confidence in the banking sector of Bangladesh are not drawing significant public attention. The ink is rarely dry on one story before the next begins. Rebuilding trust is a long and complex process. It certainly requires effort on the part of the regulators and supervisors. But, ultimately, as the analogy with the trust between doctors and patients makes clear, most of the heavy lifting will have to be done by the banks - their senior managements, boards and shareholders.
For financial institutions like banks, there are some significant, complicating factors around areas like competition, transparency, incentives and the like. Apart from these, there are two other issues that require attention if there's to be any prospect of definitively resolving the trust and confidence debate. First, the accountability agenda around governance and structure, and second, individual accountability, in particular, of the upper and middle management.
It is boring and embarrassing for heads of financial institutions to explain conduct crises to investors and customers. Nor the penalties that follow it. In fact, it's hard to think of a topic that is invested with more corporate energy. Boards spend anything up to 80 per cent of their time debating regulatory issues. Here the challenge is not one of intention - it's one of execution. Put simply, it is not straightforward to govern the behaviour of individuals in large, heavily stratified banking institutions. Invariably, it takes time.
Again, governance challenge in establishing long-run change is that there are, almost by definition, significant complexities involved in setting risk appetites for misconduct and corruption. It is more problematic to manage the so-called 'soft risks' - such as behaviours, choices and values - than it is to set controls and ratios that are governed by mathematical models. To come up with a 'value at risk' figure that satisfactorily states an appetite for conduct failure in the same way you would for, say, the overnight position of an investment portfolio. At a point of time, it becomes an imperative for leaders, including policy makers, to not just ask if something is doable, or whether there's a measurable risk, but to interrogate the principle behind it. It certainly applies to that core debate around accountability, where the financial sector found itself confronting some very challenging questions for quite some time. The most important, and difficult of which was probably the accountability regime.
The context seems remarkable in as much as it appears to invert principles of corporate self-preservation. Even banking during eighties and nineties - with requirements on staff to put up surety as a condition of employment and the like - had an arguably more nuanced understanding of personal accountability. Inevitably, what followed was a period of intense political antecedents and societal scrutiny. One of the most important of these - certainly in terms of the arena around governance, structure, stratification, opacity and the like - has been the requirement to construct so-called 'responsibility maps' -- HR patterns, setting out the allocation of responsibilities across individuals, governance arrangements and the like. These, in turn, are being supported by the arrival of 'Statements of Responsibility' - establishing, in some detail, the individual areas each senior leader will be accountable for - across all management functions.
Crucially, this does away with the current emphasis on 'influence', which is a difficult concept to objectively define, and is ambivalent enough to provoke legal uncertainty. And it brings us towards a system where responsibility becomes clearer and more immediate.
Though it, importantly, moves us away from a position where determining who is accountable for what within organisations can be an enormous undertaking for policy makers. So, while regulators can today collect and enrich literally billions of data points to detect sophisticated algorithmic market abuses, establishing the most basic line management relationships have proved hugely problematic in the face of corporate filibustering. The other key area here, of course, will be the new code of conduct, which lies at the centre of financial sector around high standards of accountability, and how they ultimately change the overall scenario.
The core ambition, effectively, is to make sure that where a bank contravenes a regulatory requirement, in an area for which a senior manager is responsible, it will be up to that manager to satisfy regulators that they took reasonable steps to prevent the contravention happening. That differs with the system as we have it today, where it is for the regulators to establish what steps the senior manager took, which steps weren't taken and whether they were reasonable in the circumstances. It is true that, for the purposes of problems here and there, there is no doubt that policy framework - from statements of responsibility to certification regime and conduct rules - represents one of the most significant post-crisis reforms for financial authorities. Sure, it will be a critical means of addressing that core challenge: the reformation of an environment that seems to test moral resolve to its limits.
Increase personal accountability and you have the basis for rebuilding trust and confidence in the enormously important banking sector. And that, surely, must be in the interest of us all. The recent crisis is a stark reminder that banking is trusting. The dramatic changes in the banking environment brought about by financial innovation and technological progress have not diminished the role of trust in banking. Any lack of trust significantly impairs the functioning of the banking sector and prevents banks from contributing to economic growth. A lack of trust also negatively affects banks' business and profitability. It is in the banks' collective interest to restore and preserve a high level of trust in the banking sector. Rebuilding trust is a long and complex process. It certainly requires effort on the part of regulators and supervisors, and lots have to be achieved there.
So, the experience of the sector has not been one of time being any great healer. Indeed, the similarities between cases like Hallmark, Bismillah Group, Basic Bank as well as MLM companies like Destiny have simply intensified what was already a highly polarised debate.
On the one hand, we have those today who appear reluctant to admit to wider industry challenges around misconduct, dismissing behaviour-related issues as the product of a few 'bad apples'. On the other, we have those who see repetition as proof that this is a sector that isn't engaged with change. The cycle of misconduct resembles a cycle where we appear to continually return to the same starting point. It's high time all concerned gave a hard look at the situation and do the needful.
Muhammad Abdul Mazid PhD, former Secretary to GoB and Chairman, NBR, is Chairman, Chittagong Stock Exchange.
mazid1273@hotmail.com