However, it would take a drastic shift in regulatory philosophy and changes to the fundamental fabrics of existing supervisory regimes if we want to focus more on individuals rather than the firms. But to achieve to a large extent what Professor Goodhart proposes, I believe bank regulators could attempt to require banks to focus more on governance, culture and ethics. 17. If a bank is willing and able to own good corporate culture and governance with the appropriate incentive system to induce proper behaviour, then I, as the supervisor, would be very willing to take a step back and adopt a much less “intrusive” mode of supervision. My colleagues in HKMA can keep more of a distance from a bank if they have confidence that the bank and its staff would not behave improperly, not because of constant and intensive external policing but because it would be against their core values and culture to harm the interests of their customers or of the bank through their own misconduct. 18. Ladies and gentlemen, I truly mean what I say. This is why in the last few years the HKMA has been telling banks that they need to cultivate the right culture and values. Moreover, we have instituted a new programme to engage and equip the Independent Non-Executive Directors (INEDs) of banks so they can become more effective in providing the necessary checks and balance on the management.
Through these successive waves, the world financial system found itself with almost every link in the credit chain – in the chain of trust – having been weakened or broken. That is evident in surveys of the public’s trust in industry: banking and finance are firmly rooted to the foot of the league table of trust, in the UK and internationally (Chart 6). That loss of trust is mirrored in aggregate bank lending in the UK, in particular to companies, where annual growth has fallen from a peak of 23% in March 2008 to around zero now (Chart 7). And this has in turn been reflected in the largest and most synchronous global economic slowdown since the Great Depression. Confidence and credit So how is trust, and thereby credit, to be restored? To date, the answer has been to rely on the one sector whose credit has not been seriously questioned – governments and central banks. There has been large-scale provision of government and central bank credit over the past two years in an attempt to ease pressures and shore up breaks in the private sector credit chain. These interventions have been unprecedented in size during peacetime. The total potentially on the table is in excess of $ trillion.7 That is roughly $ for every man, woman and child on the planet. Half of the world’s 20 largest banks have needed direct government support. Central bank balance sheets in the major financial centres, including in the UK, have more than doubled in size.