Efforts are currently underway, and indeed have been underway for some time, to hold banks more “accountable.”
Accountability, on its own, is a necessary and admirable goal. But accountability for accountability’s sake, with no clear notion of who banks should be accountable to or for what they should be held accountable, simply impedes the bank’s basic function of creating wealth.
It seems to us as though a bank is only really accountable to two parties – its shareholders, and the rest of us. Which is to say, everyone.
When a bank takes a risk, its inevitable payoff or loss immediately affects its bottom line, in some measurable way. This, in turn, affects its stakeholders, be they the small group that has privately owned the bank for generations, or the millions of shareholders who buy and sell the bank through public exchange every day.
But those risk results are also felt by non-stakeholders. A profitable endeavor may help facilitate more growth in any number of constructive ways.
But non-profitable endeavors are felt too. They’re felt when loan pools shrink, or when rates inch up to cover losses. And when too many risky endeavors fail to pay off, it’s felt when the government has to step in to prevent further loss.
For the past two years now, we’ve all felt the sting of too many non-profitable endeavors. Banks took risks in an effort to keep manufacturing money, and the risks caught up to them.
In hindsight, our inclination is to vilify banks for ever taking the risk in the first place. But to do so misses the point of why the risk was originally taken – the potential for reward.
If the credit default swaps, complex derivatives, yield manipulations and securitization frenzies of the past decade hadn’t blown up in our face, if their inherent riskiness had proven worthwhile, would we still be clamoring for more “accountability?” Or would we instead still be out buying homes and growing businesses with the accumulated rewards, in turn fueling more growth?
Of late, the Obama administration has taken steps to build more accountability into the bank regulatory system. By limiting, or outlawing, a bank’s ability to make money for itself by investing speculatively, sometimes at great risk, the argument goes, the bank itself will be more accountable to those it serves.
But we’re not sure this kind of regulation holds banks accountable to anyone. Instead, it holds them hostage to a surging tide of populist outrage.
Accountability comes with recognition that risks have to be taken, and from disclosure of exactly what risks are being taken, what the potential rewards are and what happens if the venture fails. Accountability comes only after realizing that not taking risks does us all far more harm than good.
We support more transparency in banks’ proprietary risk-taking. We support the notion that those taking bigger risks must do more to proactively mitigate the damages if those risks don’t pan out, including through the building of more substantial loss reserve pools.
What we don’t support is the outright closure of avenues, however risky, that might help banks generate more money, money that in turn might generate more loans, better terms and reduced fees. Careful oversight, yes, but not closure.
Bank accountability should be focused on an overt acknowledgement of the risks inherent in risk-taking, and full disclosure of the steps taken to help control those risks.
But channeling popular anger into regulatory power consolidation is not accountability – it’s politics, and it should have no place in a bank’s decisions on risk.
