In 2008 the world suffered its most severe financial crisis since the calamities of the 1930s. Since then debate has raged over just what went wrong. Some blame greedy bankers, anxious to profit at any cost. Others blame banks' foolhardy approach, tolerating senselessly high levels of borrowing and marketing financial products too complex to understand. Still others fault regulators for being asleep at the wheel, while still others point the finger at an intemperate public willing to borrow beyond its means to spend recklessly or to make a quick buck. Look closely at all of these diagnoses, however, and a common thread emerges: that of a banking system in which all sense of personal obligation and duty has vanished. The critical problem with modern banking is that has sought to depersonalise and dehumanise a fundamentally human business.
Neither governments or banks themselves seem to understand this point. Both have treated the resuscitation of the financial machine as a mechanical matter. Tinkering with the machinery--to separate proprietary trading from commercial banking, for instance, or topping up the capital buffers--ought to have done the trick, in this view. Yet this approach does not seem to be working. Trust in the financial system is not restored. Banks are not making the right loans in enough quantity to generate a speedy and sustainable economic recovery. And both indebtedness and asset prices are creeping higher, as traders and households alike turn back to the financial strategies they know best. Indeed, regulator meddling may be making things worse. The key to returning the financial system to health is not necessarily to build safer banks but better banks: more humane banks.
A more relationship-orientated banking system might sound trite, but it could rebuild financial health in three key ways. First, it could contribute directly to consumer confidence. The average customer has good cause to doubt that they are going to be well treated and looked after by their bank. Banks do not wish to deal with customers in the way that they used to in the past. New technologies have made many aspects of personal banking more convenient and efficient. Yet banks might have used technology to improve customer service and to free resources to guide confused customers: toward better savings vehicles or loan products, for instance, or toward banking options that do not prey on the unwitting in search of fee income. Banking is a service industry, and banks should embrace their service role and and deal with the customer on a personalised basis. They should know about the customer and the customer should know about the bank they are dealing with and trust that its employees will provide sound financial advice.
Secondly, banking with a human touch should lead to greater support for small and medium-sized businesses. Banks now busy themselves making excuses for their failure to lend, based on onerous regulation or a need to rebuild capital. Yet in many cases the amount of money that these smaller businesses require is very small. One can imagine a different approach, in which banks are honest and ethical, yes, but more importantly build a true relationship with their customers. Technology and financial models are no substitute for learning about the client, where he lives, what her family and occupational life are like, and what his aspirations are. Banks are not charities, it is true. But reliance on financial models or metrics at the expense of any human relationship means that banks are necessarily missing out on opportunities to do well by doing good: to build a stronger economy by helping small business meet its financial needs.
The deterioration of the human side is just as relevant to regulators. Their focus, so far, has been to inoculate the system against bad financial behaviour, which is seemingly taken to be inevitable. Regulators are therefore focused exclusively on things like banks' capital base, rather than their underlying business model. Here again we can see the possibility of something different and better: a regulatory system that seeks to cultivate in banks a true fiduciary duty to their customers, to get them to behave like counselors rather than casinos. One shouldn't underestimate the magnitude of the change in attitude required. Yet there is no reason for us to take for granted that banks should be built upon a model of short-term profits at any cost.
Such a broad shift could ultimately pay dividends in other ways. A more relationship-orientated banking system would seek different sorts of talent for its labour pool: people skilled at human interaction and anticipating customers needs, rather than bloody-minded profiteers content to crunch every aspect of the system down to numbers. That, in turn, could make banks less likely to stampede toward excessive risk whenever the credit tap is turned on.
To get to this new world will not be easy. There is only so much that government can do. Shrinking too-big-to-fail banks down to size is a start. Whatever benefits customers derive from their massive banks hulking size are easily offset by the insulation against market pressure that size provides and the simple difficulty of prioritising service in such massive organisations. Banks themselves may need to restructure, to free themselves from the imperative to meet quarterly profit targets; private banks might be a promising alternative in some cases. One might ultimately hope that a mix of pride and shame might encourage leading bankers to shepherd their institutions in the right direction. It is a sad moment when so many banks endangered their economies and found themselves forced to lean on government for support. One might also hope that markets will come to the rescue, leading to new banking business models built on customer service and counselling that pressure competitors into sprucing themselves up.
One thing is certain, the current approach will not restore stability for long. While we may cross our fingers and hope that crisis can be avoided, we should not forget the roots of the financial systems troubles. Those problems will continue to arise so long as banks and regulators remain convinced that banking is built on profits and losses rather than customers, clients, and a commitment to ethical behaviour.