Skip Content

Bishop Justin writes in Bloomberg on virtue, vice and banks

Thursday 10th January 2013

The following article by Bishop Justin Welby was published in Bloomberg, the online business and financial news service.

The article follows in full.

Virtue, Vice and Banks

Late one night 20 years ago, when I was an oil executive rather than an Anglican bishop, I had run out of steam and patience toward the end of a complex multinational acquisition. We came to yet another bit of box ticking and I suggested we skip it, because we knew the material was accurate.

“Justin,” our wise investment-bank director said quietly, “you know that’s not how we do it.”

Under pressure, everyone is prone to make bad decisions and that story remains in my mind as I sit on the U.K.’s Parliamentary Commission on Banking Standards, listening to people talk about banks, bankers and their failures.

It is blindingly obvious that the banking system we had a few years ago has more or less collapsed. I’m reluctant to cast blame -- being a bishop, I tend to look to the Bible, and am reminded that Jesus said, “Whoever is without sin, let them throw the first stone.” Yet it is clear that responsibility needs to be taken and structures created that lean toward virtue rather than vice.

Libor Response

Our commission was set up in July to review the culture and standards of banking in the U.K. Its creation was a government response to the numerous scandals that had erupted, whether around the London interbank offered rate, money laundering or simply the continuing high remuneration of many people in the banking sector. At least in the U.K., these levels of pay are seen as totally out of line with the rewards offered to those who carry out objectively essential services in health, education or, for that matter, the armed forces.

The development of the financial-services industry needs to be thought through as part of a significant restructuring of the values within that sector of the economy. The false assumptions that led us into our current predicament must be rejected.

Let’s start with some of these false assumptions. First, it is clear that rational market theory and its relatives have been undermined by the events of the past five years. Adam Smith’s general cynicism about the tendency of any group of business people, when meeting together, to create a cartel and ensure maximum profitability, has been shown to be justified, both in its own terms and as a general reflection (which he understood well) of the susceptibility of human-made systems to human failings.

A second myth to fall has been the idea that financial services could, by themselves, carry the economy. A remarkable 2009 article by Martin Wolf in the Financial Times pointed out that the U.K. had been behaving like a “monocrop” economy. By that he meant that it was heavily dependent upon one sector alone: When the financial-services industry went well, all went well, and when it went badly, everything went badly. The ups and downs would be more severe. I believe the jury is now out as to whether, since the reopening of the Eurobond markets by S.G. Warburg & Co. in the early 1960s, financial services have been a net benefit to the U.K. economy as a whole.

I suggest that much the same might be said about the U.S. market. Banking and financial services have created a significant number of jobs, but the amount of money spent in rescuing them since 2008 eliminated a vast proportion of -- if not more than -- the gains in employment and tax revenue that the sector generated over the previous decades. In addition, the very high rewards on Wall Street and in the City of London drew the best and brightest talent away from areas that are more productive and more likely to contribute to society. A culture in which activity is carried on for its own sake, however skilled and hardworking (and bankers tend to be both), is social anarchy in one form or another.

Common Good

The third major area of inquiry lies in the failure of financial services to enable society to flourish -- what in Catholic social teaching is known as the “common good.” Much of the financial-services industry became essentially self- regarding, and one result was that small and medium-size businesses as well as poor areas were neglected, often unable to obtain credit.

In my diocese, I recently met a man who had lost his job two years ago and, as a skilled painter and decorator, wanted to set up in business. He was on unemployment benefits at the time and required 200 pounds ($321) to get the equipment he needed. No bank was interested in financing him, until he came across a social enterprise that provided the funds. He has now paid the money back and has a full order book until at least May. A modern financial-services industry should do better in supporting such enterprises.

So what are the answers? Our committee has heard from some of the greatest bankers of the age, including former U.S. Federal Reserve Chairman Paul Volcker, whose evidence was magisterial and amusing, and we issued our first report last month. I think a number of practical steps must be taken.

First, utility banking must be separated from investment banking. Utility banking should have utility returns and -- like the provision of water, electricity and gas -- should be regulated so as to ensure minimal risk and maximum effectiveness. Exactly where the boundary between these two forms of banking is drawn can be debated, but drawn it must be.

Second, I am deeply suspicious of the intensely complex regulatory structures that are emerging out of the crisis. They are well-intentioned, but impossible to operate. My own experience of heading a large organization in risky areas (in my case, a hospital) showed me that the more complex one makes the regulation, the less likely it is to be adhered to. The head of a major bank whom I interviewed recently told me they had 3,500 compliance staff and 900 lawyers. Good luck with that!

Simple Regulations

The reason I started out with the story of my own rescue from an ethical slip is that to me it demonstrates that it isn’t regulations, but virtue and leadership embedded within corporate cultures, that stops people from stumbling when under pressure.

Third, it seems essential to ensure that all those working in financial services have professional qualifications. In the U.K., anyone involved in managing other people’s money has to pass exams. This should be the same if they are dealing in foreign exchange, derivatives or proprietary trading for a bank. Qualifications in mathematics are not the same as qualifications that enable people to reflect on their own conduct and examine their own consciences as a matter of self-discipline, in the same way as they seek to balance their book at the end of a trading day.

There are no simple answers to the current crisis in banking, but there are simple principles. They come down to saying that financial services must serve society, and not rule it. They must be integrated into the economy, not semidetached. They must recognize human fallibility, not assume the effectiveness of human imagination.

© Justin Welby

Back · Back to top