Wednesday, April 11, 2012

Will We Ever be Able to Trust the Banks Again?

The global financial collapse of 2007-08 was no ordinary crisis. It meandered along, starting in August 2007 with the collapse of the AA and AAA-rated hedge funds managed by the investment bank, Bear Stearns, followed by the merger of Bear Stearns with a leading commercial bank, JP Morgan Chase. The crisis peaked with the bankruptcy of the venerable investment bank, Lehman Brothers, in September 2008 and the first of many Oh-My-God (OMG) moments in the global financial sector. Trouble continued as the U.S. taxpayers bailed out first AIG, one of the largest insurance groups in the world, and then Citigroup, once the biggest bank on the globe. Between September 2008 and March 2009, the global economy appeared to fall off a cliff, as indicated by the graphical charts showing the decline in global economic production. The world’s economy was declining at a pace faster than in the six months after the stock market crash of October 1929, which heralded in the greatest economic depression the world had known. That ended the debate on whether or not extraordinary measures were in order. There was no longer any question that massive action was needed.

The world’s financial regulators then pulled out all the stops, with coordinated massive injections of cash into the money supplies of the world’s largest economies. It was the shining moment of the Group of Twenty (G20) countries that represent 85 percent of the world’s total economic output each year.

And yet, something far more fundamental has changed. It came down to trust. Public trust in government, in banks, in financial service providers had been deeply eroded. Public trust had shifted—and it shifted worldwide.

The Edelman Trust Barometer bears witness to the changes. The Barometer consists of a survey of over 25,000 respondents in the 25 largest countries in the world. The survey has been conducted every year for 12 years. The 2012 survey provides fascinating insights and some very useful suggestions for leaders in government, business and civil society.

The 2012 survey shows that the publics in fewer than half the countries trust their governments to “do the right thing.” The governments coming out best are those with strong civil responsibilities—the United Arab Emirates, China, Singapore. Those who garner the least public trust are all in Western Europe, starting with Ireland.

Furthermore when asked about the best role for government, 31 percent said that governments should “protect consumers” and another 25 percent responded that governments should curb “irresponsible business practices.” Other roles, such as building the necessary infrastructure for business, were also important but far down the list of priorities. It is clear that the general publics feel that the priority of their political leaders should be to ensure consumers are protected from abusive business practices.

Banks and financial firms come under particular attack. The 2012 survey looked at which industries were the most trusted. At the very bottom of the list were banks, second only to financial service providers. What would you guess would be the number one must trusted industry? The first was technology. The second was telecommunications.

One can also ask why. Safe and Fair Finance Blog argues that it is the technology and telecommunications companies that make consumers feel more powerful—and indeed make them more powerful. No one watching the huge crowds on the streets of Egypt and Tunisia in 2011 and Russia in 2011-12 could doubt how technology and telecommunications have enabled consumers to march together and make their voices heard through their numbers.

Safe and Fair Finance Blog also suggests that governments and financial firms should find ways to join forces with technology and telecommunications to make consumers of financial services more powerful.

The Edelman Survey provides some useful hints. The survey identifies which types of individuals are most respected in the public eye. Academics remain the first most trusted but the 2012 survey shows that other traditional sources are not trusted as deeply as earlier. Technical experts are no longer second on the list, as they were as recently as 2011. Chief executive officers have fallen to the near-bottom of the list of respected sources. Rather it is a person “like me” or a “regular employee” (i.e. not the chief executive) who are most relied upon.

This suggests that finding ways of tapping into the ideas of other users “like me” may be one of the best ways of building public confidence in banks and other financial institutions. On a recent trip to Ukraine, one of my colleagues had used to find out the quality of the hotel we had chosen. Yelp is an excellent way of finding out which are the best service providers--from hair stylists to morticians to car wash companies. One might ask if the same could done for financial service providers.

The Edelman Survey quotes Vikram Pandit, chief executive of Citigroup as saying that the loss “of trust arose not from a failure of capitalism but from specific failures by certain participants in the finan­cial system. We could go a long way to regaining that trust by making the system more transparent, by clearing some of the obscurity that causes people to believe the system is a game rigged against their own inter­ests.” Safe and Fair Finance Blog would like to suggest that Mr. Pandit may be on to something. Making finance transparent and ensuring that consumers are treated fairly are critical building blocks if the public is ever to trust the banks (and other financial firms) again.

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