A code of ethics for bankers – Challenges and opportunities

Alexandra Zeitz (St Antony’s College, Oxford)

Speaker: Robert Mass, Head of International Compliance, Goldman Sachs
Chair: David Vines, Balliol College, Oxford

The financial services sector continues to grapple with a string of headline-grabbing scandals. One interpretation of this has been that the industry suffers from a serious shortfall in ethical standards. Various solutions have been offered for the apparent “culture problem”. High profile commentators have argued, for instance, that managers should set a “tone from the top,” correcting for deficits in ethical standards by modelling conscientious behaviour towards clients, competitors and co-workers and expecting the same from those further down the ladder.

One popular response to the seeming problem of values has been to set out ethics codes that explicitly commit bankers to clear normative standards. Barclays, for instance, unveiled a code of conduct in 2013 as part of its efforts to address the cultural deficits that underlay the foreign exchange-fixing and personal protection insurance scandals. In 2015, the G20 released a set of Principle of Corporate Governance. What can such codes achieve, and what should they include?

In February, PEFM hosted Robert Mass, Head of International Compliance at Goldman Sachs, to discuss his proposals for a code of ethics for bankers. Mass’ engagement with codes of ethics was incredibly wide-ranging, spanning both the philosophical and pragmatic.

In order to be effective, says Mass, codes of ethics must be rooted in existing social practice, in the day-to-day lives and expectations of those they hope to influence. Drawing on moral philosophers including Hume and Smith, Mass argues that ethical standards cannot be given a priori; instead, cultural norms arise out of particular cultural milieus and conventions. The challenge of an ethics code is to set out the principles contained in existing practice, to codify them, in order to encourage socially appropriate behaviour.

The Eurozone crisis and South East Europe: Recovery or illusion?

Alexandra Zeitz (St Antony's College, Oxford)

Speakers: Adam Bennett, St. Antony’s College, Oxford; and Peter Sanfey, European Bank for Reconstruction and Development 

Chair: Jonathan Scheele, St. Antony’s College, Oxford

In late January, the PEFM seminar series was treated to a data-rich and fascinating account of the crisis experience of South East European states.  Adam Bennett of St. Antony’s College and Peter Sanfey of the European Bank for Reconstruction and Development (EBRD) presented the book they co-authored with Russell Kincaid, formerly of the IMF and the late Max Watson, also formerly of the IMF and founding director of PEFM.

Economic and Policy Foundations for Growth in South East Europe (Palgrave, 2015) reviews the experience of crisis in the ten South East European economies and argues for renewed commitment to reform to ensure sustained prosperity.

The South East European (SEE) states comprise Albania, Bulgaria, Romania and the seven successor states of former Yugoslavia. Bennett outlined three distinct phases of development in this region since the onset of “transition” in 1990. The first ten years he characterized as the “valley of tears”, as countries variously underwent the dismantlement of economic systems and then rebuilt them, or were ripped apart by conflict. The second phase comprised the boom years of the first part of this century through the onset of the global economic crisis at the end of 2008, when all countries managed to achieve remarkable (and too good to be true) growth rates—the “sunlit uplands” of peace and fruition of reform. The final phase, where SEE arguably remains today, was characterized as the “wilderness years” of post crisis recession followed by stagnation.

Though there were of course idiosyncrasies in their economic trajectories in the build up to the crisis and stagnation of 2009-2014, the trends across the region are instructive. On the basis of detailed country-level data, Bennett described the emergence of a massive savings gap in these economies during a boom period that stretched from 2000 to 2008.

Was the global financial crisis really a “debt crisis”?

Alexandra Zeitz (St Antony’s College, Oxford)

Speaker: Anatole Kaletsky, Gavekal Consultancy
Chair: Adam Bennett, St. Antony’s College, Oxford

We are accustomed to analyses of the 2008-9 financial crisis that point to and dissect particular causes of the crisis, using these to call for post-crisis reform, regulation and rethinking. In a presentation at the PEFM seminar on January 25, Anatole Kaletsky instead gave a much wider-ranging and sweeping account of the causes of global financial crisis, and outlined the fundamental shifts in the relationship between governments and markets that he believes it has unleashed.

In 2010, Kaletsky published Capitalism 4.0: The Birth of a New Economy in the Aftermath of the Financial Crisis (Bloomsbury). In his presentation in early 2016, he argued that many of the false diagnoses of the crisis that he wrote the book to challenge continue to dominate post-crisis conversations. Rather than placing blame on individual bankers or on high pre-crisis debt levels, Kaletsky sees the global financial crisis as the demise of an entire theoretical and ideological view of the economy, collapsing in on itself as economic rules came to be applied dogmatically. 

Blind faith in the efficient market hypothesis led both regulators and market participants to make bad decisions – foremost among them the Henry Paulson’s decision to allow Lehman Brothers to fail – bringing down the intellectual consensus that had supported the previous structure of capitalism.

In Kaletsky’s view, the rupture the crisis provoked in both economic theory and practice will lead to a new practice and understanding of capitalism. In fact, he argues this reinvention of capitalism is just the latest in an ongoing process of evolution and adaptation. Kaletsky’s historical narrative begins with “Capitalism 1.0,” emerging in 1776 with the independence of the United States, and coincidentally also the publication of Adam Smith’s Wealth of Nations.

The IMF in the Balkans: Recent experience

Alexandra Zeitz, St. Antony’s College, Oxford

Speakers: Adam Bennett, St. Antony’s College, Oxford and Robin McConnachie, Oxford Analytica

Chair: Stewart Fleming, St. Antony’s College, Oxford

When the IMF is called in during a time of economic crisis, the programme agreed is often politically contentious. One of the defining questions in the aftermath of the IMF’s intervention is frequently: “did it work?” In late November, PEFM heard from Adam Bennett, formerly of the IMF, about the effectiveness of IMF programmes in a region where the Fund has played a prominent role in recent decades: the Balkans. Robin McConnachie, who has acted as an advisor to governments in the region, contributed his insights into what makes for successful reform programmes. 

How does one capture the impact of an IMF programme? Bennett explained that the Fund itself has grappled with the numerous measurement challenges of evaluating effectiveness. Simple measures comparing indicators before and after an IMF programme neglect the counterfactual of how the country would be faring in the absence of an IMF programme. Comparisons between countries with and without IMF programmes cannot account for the fact that countries with IMF programmes often faced worse conditions than those that received no programme.

The Fund has responded to these measurement concerns by building complex models that attempt to capture the impact of policy interventions. These models, however, can only be as accurate as the assumptions they are built on. For his evaluation of the IMF’s programmes in the Balkans, therefore, Bennett used simple comparisons between those Balkan countries with and without IMF programmes and contrasted countries’ actual performance with the targets set in the programme.

What is needed for EU competitiveness? The view from Croatia

Alexandra Zeitz (Global Economic Governance Programme, University of Oxford)

Speaker: Boris Vujčić, Governor, Croatian National Bank

Chair: Gillian Edgeworth, Wellington Management and St. Antony’s College, Oxford 

What will it take to boost the EU’s competitiveness and firm up a shaky economic recovery? In late November, PEFM hosted Governor Boris Vujčić of the Croatian National Bank, who presented his views on the roadblocks to productivity in the EU and argued for structural reforms to encourage convergence among different European regions and increase competitiveness.

There are many explanations for Europe’s competitiveness woes, particularly for why it lags behind the United States across indicators of productivity. Indeed, Jeffrey Franks’ PEFM presentation in October outlined how the IMF accounts for Europe’s flagging competitiveness.

In his account, Governor Vujčić stressed the importance of the revolution in information and communications technology, which has made huge contributions to private sector productivity in the US, but lagged in Europe. He also highlighted the problem of financing – without well developed equity markets and venture capital funders, young European entrepreneurs often lack the investment to get their ideas off the ground. Europe has also been slow, Governor Vujčić argued, to bring research and expertise from academia into the private sector. While Europe’s universities are well represented on global league tables, transfer of knowledge into business is still lacking.

More Europe, anyone?

Robin McConnachie (Oxford Anylitica; Former Senior Adviser, Bank of England) 

The PEFM seminar series at St Antony's continued last Monday evening with another look at the causes of the 2007 /08 financial crisis and the various attempts to deal with the consequences for Europe. What happens now to take this forward? The discussion was led by Lorenzo Codogno, currently a visiting Professor at the LSE , but at the time Chief Economist at the Italian Treasury, who represented Italy on a number of the key committees servicing European Finance Ministers.

Lorenzo's thesis was that contagion from the US sub – prime mortgage failure quickly infected a number of European financial sectors causing a number of different problems which were difficult to deal with simultaneously in the absence of Europe - wide bodies to produce an effective response. He showed a number of useful charts using Italy as an example – in fact Italy had been less severely affected than many other European countries. But there had been a collective deficiency in the European response to the spread of the crisis, which he called a crisis of governance. For the future the answer was to have more effective European institutions rather than a plethora of rules which could not be enforced. The macro imbalances procedures currently being developed should enable countries to see in advance and hopefully take action to avert crises but this approach was not agreed by all, with resistance to large fines being levied on non-complying countries with excessive deficits, the perversity of this throwback to the SGP being particularly objected to. What was agreed was the need for debt deleveraging but this had hardly begun. European growth should be stimulated by exploiting the opportunities created by the single market e.g. the proposed capital markets union but the existing European authorities apart from the ECB were in a state of collective paralysis: there was strong resistance in many countries on important issues like bailing in lenders or creating yet more (costly) European institutions. An agreed roadmap was required to revive the European project.

Waiting for the recovery: Europe’s financial crisis and the fragile recovery

Alexandra Zeitz (Global Economic Governance Programme, University of Oxford)

Presentation: Jeffrey Frank, Director, IMF Offices in Paris and Brussels

Blogpost: Alexandra Zeitz, St. Antony’s College

The numbers are striking and disheartening. Seven years on from the onset of the global financial crisis, Europe’s recovery remains shallow and vulnerable. Real GDP is ten percentage points higher in the US than it was in 2008. In the UK it is five percentage points higher. In Europe, by contrast, it is three percentage points lower than in 2008.

Unemployment in Europe remains extremely high. In August 2015, the average unemployment rate for the Eurozone was 11%. In Spain it was over 22%, having come down slightly from a height of 26.3% in early 2013.  Estimated potential output growth, already lower in Europe than the US prior to the crisis, fell sharply during the crisis, from 1.3% in 2006-2007 to 0.6% in 2008-2010. It has remained low, sparking fears of a European slide into stagnation.

Why has the recovery in the Eurozone been so much more sluggish than in the neighboring UK and in the US? And what tools are available to policymakers to encourage a more robust recovery, improving the livelihoods of Europeans still afflicted by the aftermath of the crisis?