St Paul's Institute

What kind of City do we want? Transcript of keynote speech given on 24th June 2013

by James Featherby

Posted: 27 Jun 2013

[This keynote speech was delivered by James Featherby, Chair of the Church of England's Ethical Investment Advisory Group, at our 'Market Ethics: Caught or Taught?' seminar on 24th June 2013. This event was the final in our series, held in conjunction with CCLA, entitled 'The City and the Common Good: What kind of City do we want?', and included responses from Laura Berry and Bishop Peter Selby. The event was Chaired by Michael Quicke.

A full recording of this event, including responses from panel members and audience questions, is available here.]

What kind of City do we want?
24th June 2013

What a huge privilege it is for me to be here with you this evening. May I say an enormous thank you to the St Paul's Institute for hosting this gathering, and for inviting me along to share some thoughts with you about banking.

And thank you so much Michael Quicke for kindly agreeing to chair our discussions. Michael has a rare combination of talents: amongst other things, a passionate commitment to doing the right thing, combined with a deep understanding of the real world. When I grow up, I want to be like Michael.

Someone commented the other day that everything that needs to said about banking has already been said. But also that not everyone who needs to say something has yet spoken. I feel a bit like that tonight. My remarks this evening follow on behind a deluge of comment, including a series of three quite outstanding lectures upstairs here on the connection between banking and the common good, and of course last week's 600 page sequel to the novel Crime and Punishment.

What I hope we might do this evening is pause a little to draw breath, to give thanks for the fact that here in the UK we are still one of the wealthiest countries in the world, and to remind ourselves of the task still to be accomplished. In particular I would like to suggest a number of objectives, or principles, that we might want to see applied to banking now that the initial crisis phase is over. Not in the expectation that they can all be implemented immediately, but in the hope that they might guide us in the right direction as we seek to move forward.

And I hope you will not mind me saying that my comments this evening are purely personal.

I had the pleasure of bringing up to London with me last week two dear friends from Tanzania. They live on the edge of the bush, in the middle of that vast country, and they had never been to London before. We visited this great Cathedral, had tea in the Tate Modern, and walked along Whitehall. We drove around Trafalgar Square, down the Mall towards Buckingham Palace, and alongside Hyde Park.

What do you think their most significant reflection was on what they had seen?

What impressed them most was that here was a highly complex society, but a society focussed on valuing both the individual and the community. Somehow we have managed to create a city that, by and large, does two things. First, it knits together the importance of both self and other. And second, it recognises that in fact I am better off when I co-operate with my neighbour than I am when I simply plough my own furrow.

One of my cousins went spectacularly bankrupt a few years ago. Both the moment of bankruptcy, and its aftermath, have been deeply cathartic, cleansing, and healing processes for him. He has faced full on the effects of his irresponsibility. Society has now deprived him of his credit cards, and he has learned to live without the addictive buzz of juggling his creditors. He has learned to live a new life, but one that damages neither himself nor those around him. My cousin is a very creative and effective man. He is now using those skills within an environment that is safe and productive. He is a much happier man.

If capitalism had been true to its colours virtually every major Western bank would have gone bust in the financial crisis. Just about every insurance company and pension fund might quickly have followed. I have no problem with the fact that the banks were saved. The alternative would have been disastrous. But let us not fool ourselves by saying there was no crisis in capitalism. Only a mammoth act of social injustice has saved us, at least for the time being. But as a consequence, unlike my cousin, we have not properly gone through our own cathartic, cleansing, or healing process.

At this point I should say that I love the City. I have worked here for over 30 years. I love its people and its creativity. Both my father and my grandfather were bankers all their lives. My comments this evening are intended to build up, not to tear down.

Last year I went to visit a community in Western Kenya. It took me a seven hour journey to get there across the Rift Valley to the west of Nairobi. Just on the eastern edge of Lake Victoria, there is a community of 40,000 people nearly all of whom get their living from artisanal gold mining. Basically, that means picks and shovels, mineshafts 100 metres deep, and no safety equipment. The gold is separated using mercury and other lethal chemicals by hand. It is then sold to local traders at way below market price and almost none of the proceeds are invested back into building any social infrastructure such as schools, medical care, sanitation, or decent housing.

The aspiration of most of the miners is to strike it lucky and buy a motorbike. Just before I got there, one miner had done just that, got drunk, and killed himself on his bike. I visited one site where there is a gold rush happening because they have found a rich seam. It was like a scene from a wild-west movie.

Nearly every miner I met told me the same story. If only they had more money to buy better equipment. Then they could extract and process more rock and sell more gold. Then both their economic and their social problems would somehow be solved.

Three things became clear to me on that trip. And they are around purpose, philosophy, and structure.

First, if we do not change what we are aiming for nothing will change. The miners thought that, just by increasing their wealth, life for everyone would improve. It clearly would not. The financial crisis has revealed that we have been making the same mistake; making wealth creation the pinnacle of our ambition.

But I am delighted that everywhere I go, people are now asking the same basic questions. What is it that we want in life? What is it that we value? What kind of individual and communal life together do we want? Without answering these questions we cannot find a new direction for banking. Purpose is everything.

Second, it became clear to me on that trip that if we do not change the way we think that good things are achieved, and if we do not change the way we think that bad things are avoided, then nothing will change. Purpose may give you direction, but it is your philosophy that gives you the tool kit you need for the journey.

Those Kenyan miners are not the only ones who believe in magic. We have built our own false idols. We have worshipped at the temple of economic growth. We have believed that a combination of efficient market hypothesis, utilitarian calculation, and modern portfolio management theory will together give us a green and pleasant land.

It is not just that worshipping the wrong god is a spiritual and moral mistake. It is also an intellectual mistake. The problem with idols is that they fool you into believing that the world works in a particular way that revolves around them. So money has fooled many of us into thinking that increasing our wealth is the only and best answer to our personal anxieties and our social problems; providing status to resolve our need for personal recognition, and paying our taxes so that we can outsource to others the compassion we might otherwise need to show ourselves.

And nothing will change if we continue to think that we can create a better world for our children and ourselves by continuing to be individualistic and reductionist, by continuing to make decisions based on pragmatism and never on principle, and by continuing to interact with the world through a lens of fear and self-preservation.

We need a different philosophy.

We certainly need an enterprising and flourishing business economy, but we also need a philosophy of mutual benefit and holistic analysis. We certainly need banks that are safe, but we also need to trust that long-term financial returns flow from generosity and adventure within business relationships. We certainly need models and forecasts, but we also need to be humble about the extent of our knowledge and ability. And we need to learn that the richest man in the world is the man who is content with what he has, not the man who makes every decision based on a discounted cash flow.

Third, I realised in Kenya something about the effect of structures. To make progress the Kenyans will need to overcome the power imbalances that exist between mine owners and mine workers, the vested interests of the career politicians, and the rent-seeking grip of the local gold traders. The City is no different.

The City is not a rotten place full of bad people doing evil things. Many of us know it to be a place in which mostly good people are doing the best they can with what they believe to be true. But we should not underestimate the power of the system to lead good people into making poor choices. If there are bits of the system that almost inevitably lead City practitioners into behaviours that are harmful to customers and society then no attempt to reform the culture of the City is ever going to be successful.

I find these three tests helpful as I consider where we are now on the journey of reform: purpose, philosophy and structure. You might call this three-fold test Total Morality.

Ethics without purpose are lifeless. It is only purpose that provides the rational for the sacrifices sometimes called for by morality. It is only purpose that gives you the courage to persevere. Fortunately for business, there is a paradox within business that unites profit and morality. It is only by serving the best interests of customers that business has a long-term future. It is interesting that the independent Salz review of the cultural problems at Barclays identifies the lack of a shared common purpose within the bank as one of the main reasons for its serious cultural failures.

I do not have the figures for today, but in 2011 every one of the world's largest 79 companies, in terms of asset size, was a bank. If the 79 largest companies in the world, in terms of assets, remain focussed on extracting value for themselves, and on externalising to everyone else the risks of their business - as opposed to being focussed on serving the best interests of customers and the economies of which they form part - then it will again be a race to see who it is that blows up first: banks or society.

So purpose is key, but philosophy is also vital because morality has to make sense. If we do not believe that courage, empathy and prudence lead to good outcomes then we are not going to adopt them as our values. If we do not understand how it is that stewardship, service and integrity create long-term, sustainable value then they are just going to stay as words on a corporate mission statement.

And we need the structures of our institutional and personal relationships to help us achieve our beneficial purposes, not hinder us as we seek to do so. If there are conflicts of interest, asymmetric risks, or financial reasons to be disinterested in the welfare of others - each of these things leading us into temptation - then into temptation they will surely lead us. The reform of ethics in the City will not be effective unless and until the City acknowledges, and seeks to minimise, these structural obstacles to just and equitable business relationships. As Archbishop William Temple put it,

"The art of government is the art of so ordering life that self-interest prompts what justice demands."

Let us apply the first and the third of these tests, purpose and structure, to the banking sector. If the City had been swept clean by bankruptcy in 2008, a bit like in the fire of London in 1666, what kind of banking sector would we now be seeking to build? I would suggest that we would want a banking sector that was moving towards, and not away from, the following ten characteristics.

1. A banking sector with a public objective to go alongside its private purpose.

In practice, what this would mean would be an industry incentivised to help retail customers budget and save as much as borrow and spend. And an industry incentivised to finance innovation, productivity and other income producing activities in the real economy on a national and regional basis, and on a long term, sustainable basis.

The recent Parliamentary Commission on Banking Standards has recommended that the government should consult on changing the definition of directors' duties to remove the primacy of shareholders in banks in favour of the safety and soundness of the bank. Where a bank, alone or with others, has a dominant or controlling influence over the UK banking market perhaps we might also call for a duty in favour of the UK economy.

2. A banking sector restricted in the amount of credit it can create to finance real estate and financial assets such as equity and debt securities, and with a particular focus on restricting credit to finance short term trading and derivatives.

The policy objective here would be to discourage those activities which create asset price bubbles, and to discourage those activities which divorce finance from ownership, and therefore to discourage those activities which divorces finance from responsibility, concern and long-term investment.

3. A banking sector that is internalising its losses.

4. A banking sector that is safe enough and transparent enough to be trusted.

5. A banking sector that is taking responsibility for its product, and therefore seeking not to sell unmanageable debt to borrowers.

6. A banking sector that is not proprietary trading, and therefore not gambling with other people's money.

7. A banking sector that is not receiving tax-payer subsidies, either through state guarantees or a tax-payer subsidy for its core product - debt.

8. A banking sector that has business models that are stable, through different economic cycles, so that loyalty can be shown to staff. Because, without loyalty and long-term consideration being first shown by banks towards staff, no loyalty or long-term consideration will in return be shown by staff towards banks.

9. A banking sector that is open to the free winds of competition driving customer benefit.

10. A banking sector where the financial incentives of staff are aligned with all of these objectives.

This, of course, is not the industry we have.

At the moment we have a banking sector that is not financing economically useful activity, that is creating significant risk for commercial and retail customers, that is financing the wrong kind of economic activity, that is still structured so as to internalise profits and externalise risks and losses, and a banking sector that is dehumanising for staff.

We are still held hostage by a banking industry that has significant power but little responsibility. And significant power without matching responsibility is always a mistake.

A thread running through these suggested characteristics is to reduce, and to reduce substantially, the level of debt in the economy. Excessive debt centralises power, increases inequality, encourages profligacy, produces inflation, creates unstable economies and traps the poor. And, as we are now seeing right across Europe, it also undermines democracy.

This reduction in debt would mean two things. First, substantially smaller bank balance sheets. And, secondly, a higher percentage of investments, both within and outside the banking sector, in the form of equity rather than debt - investments that share risk rather than demanding their pound of flesh.

On a score of 1 to 10, with 10 being the best, how would we currently rate the banking industry against my suggested ten characteristics? One of my best friends is a primary school teacher, in charge of the reception class. She has just been writing her end of term reports. For the more challenging children she has found a delightful way of being both encouraging and accurate,

"Alisha is working towards recognising the number one."

Here are some words from Martin Wolf, writing in last week's Financial Times:

"The financial crisis has imposed economic and fiscal costs upon the British economy and public finances that rival those of a world war. This brutal fact must inform the response. It is why it has to be radical. Business as usual will not do because that could lead to national ruin. No industry can be allowed to operate in such a way.

The banking industry has taken the public for a ride. Despite substantial and welcome reforms, it still does so.... it is too important not to be reformed."

All of us care about these things as citizens. But those of us who are involved in the asset management industry should also care about these things because of their effects on the savings of our beneficiaries.

We make a mistake if we analyse the banks simply based on the risk they pose to the value of our investments in them. As we saw in the financial crisis, and as we continue to see in the opportunity cost of a lost decade of economic growth right across our portfolios, the risk is much more significant than that. We need banks to be safe, and financing economically useful activity, not because of the value of our investments in banks, but because of the value of our investments in the rest of the economy.

I still do not see any real signs that the government is tackling the right issues, or tackling them with enough resolve.

Governments always tend to respond to problems by waiving a stick at the donkey. I am not doubting that we need some sticks, but we must remember two other things. First, it is only carrots that truly inspire, and second the donkey needs to be on the right path.

By now, I am sure you will have guessed that I not have a great deal of faith in any of the culture change programmes currently underway in the banking sector. I do not doubt their seriousness or their good intent. But banks have, at least for the time being, forfeited their right to ask us to trust them. What we need are embedded changes that are not subject to the whims of the current board or to the preferences of the current chief executive.

While the objective of banks remains focussed on any target other than the wellbeing of the real economy and customers, and while the structural incentives within banking remain focussed on precisely the opposite to that wellbeing, then no culture change programme is going to succeed even in the medium term, let alone the long term.

Perhaps the most important step is to lower the leverage ratio of banks, and I would argue for a very substantial decrease. Some are talking of equity of 30% not 3%.

The leverage ratio is key for two reasons. First, it is the most effective tool for incentivising banks to be interested in the long-term financial health of their customers, and of the economy from which they are drawn. And, second, it is the most effective tool for protecting tax-payers, and creditors, against the foolish lending decisions of banks.

The arguments that bankers make to the effect that increased leverage would reduce the amount of money they could lend to the real economy, or would increase the cost of them doing so, are false. I would refer you amongst other places to the work of Anat Admati, Professor of Finance and Economics at Stanford Business School.

Once banks, bankers and bank shareholders are financially incentivised through substantially lower leverage to care about others, and once it is banks, bankers and bank shareholders who carry the cost of foolish lending decisions, the need for accountability automatically becomes less pressing.

Indeed many now fear that banking regulation is becoming oppressive just at the moment when we need banks to be taking more risk, not less; so long as it is a different kind of risk - risk that is in the best interests of the real economy.

It is said that positive cultures can only grow in trusting and inspiring environments. It is already difficult to manage banks, because it is difficult to manage a big organisation in a way that values the human spirit of employees, and so releases their energy and creativity into positive outcomes for the benefit of all stakeholders. In my view, adding further regulatory pressure to control banks and penalize bankers may in fact be counter-productive if one's objective is to improve the culture in banking. It is better, in my view, to focus on changing the corporate purpose of banks, and on tackling those structural barriers that stand in the way of delivering that purpose.

Only government now has the power to implement many of these changes. At the moment, with an election to win, stakes in RBS and Lloyds to sell, and a deficit to be financed, the government is failing the test of courage. We may need to stiffen their resolve.

Archbishop Justin Welby spoke recently in this Cathedral at a service to commemorate the 60th anniversary of the Queen's coronation. He repeated on several occasions the phrase 'liberty under authority', describing this as the model that explains the greatness of this country. Liberty under authority is a battle that the City and Westminster have fought with each other ever since the City started, many centuries ago, to finance the national, or at that time the royal, economy.

At one point, Archbishop Justin said that liberty is only real when it exists under authority. But how can it be that freedom is only real when it exists within limits? The loss of trust in this great paradox has been the undoing of a good deal of our Western culture.

The cry of the post-modernist is that there is no freedom if there are boundaries. But the wisdom of the ages, and our own experience, is that freedom without boundaries sooner or later becomes destructive. True freedom is the freedom to become, the freedom to journey towards who we are designed to be, released from the slavish addictions and fears that would otherwise seek to control us.

And so it is with banking. Banking within limits will release the potential of banks and of bankers to become who they are intended to be: vital and valuable members of society, respected and trusted for their contribution towards the wellbeing of all of us. Within the open space delineated by the boundaries that I am suggesting there would exist the room for creating and embedding a genuine change in cultures and behaviours. A space that is free enough to allow banks to innovate and take risks for the benefit of customers.

Because of course the objective of culture change is not to change culture. The aim of culture change is to deliver benefit to customers and the real economy, freed from the temptations to selfishness caused by self-regarding objectives or perverse structural incentives.

I think that at first, when the financial crisis began, banks and bankers were surprised by the anger and hostility shown towards them. And I am afraid it is their misfortune to have become the lightening rod for discontent about globalisation. But it is no accident that it is banks that have become the focal point for complaint. In many ways they do represent most clearly the troubled parts of modern capitalism.

They are too big and impersonal to be human, none of us individually seems to matter to them, and their core product - money - represents a source of huge power seemingly out of democratic control. Indeed their core product - money - seems to represent a harsh, immutable, and mathematical force that brooks no argument, leaves no room for generosity, and is forcing its logic into every area of our lives.

It does not have to be like this.

In closing, may I mention that when I was preparing this talk, two images came into my mind. One image was of an English meadow, a gentle river, long grass with lots of wild flowers, some willow trees, and a couple of cows grazing by the fence. The other image was of a North African landscape; that bit of bush just before the desert begins. Dry, arid, windswept. A couple of small lizards scampering across the ground, looking for somewhere to escape quickly from the heat of the sun.

We have a choice to make.

There is a new generation coming through that does place a high value on people. They are committed to justice, but not in the destructive, rebellious way that perhaps some of our generation might have been in our younger days. They want meaning, and purpose, and fun.

Are we going to pass on to them a banking industry that gives them space for energy, and passion, and service of others? Or are we going to pass on to them the arid, tightly controlled, humourless, and alienated industry that banking has become?

I do not want to be over-melodramatic. But when you start to reflect on the influence of banking on business, savings and government finances here and around the world, and when you start to reflect on the influence that the City has on the culture of finance and investment here and elsewhere, you begin to realise that what we are talking about is not some simple skirmish.

I do not think it is overstating it to say that what we are talking about this evening is a battle for the soul of capitalism.

Thank you very much for listening so patiently.

About this author

James is currently chair of the Church of England Ethical Investment Advisory Group, having formerly been a partner of the international law firm Slaughter and May.

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The opinions expressed in this article are those of the author, and do not necessarily represent the views of St Paul's Institute or St Paul's Cathedral.