ALM Partners Plc, an Asset Liability consulting company in Helsinki, organised an excellent annual event around this year’s relevant theme of “Corporate Responsibility in Finance” with a dozen or so speakers from the financial sector.
Readers will recall the recent news from JP Morgan’s CEO Mr. Jamie Dimon who, as Chairman of the Round Table, stated: “While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders.”
This is a broad and updated version of Corporate Responsibility and sustainability may slowly replace Milton Friedman’s narrow gospel that the share price is the only measure of a company’s performance!
Even though it is quite clear that most Nordic banks and their partners have a thorough knowledge about these matters, this event revealed some big question-marks about its application. The audience was surprised that Finland’s Central Bank that they do not have an enforced Sustainability Program, and the Financial Supervision was mum on that matter…
Two speakers were outstanding in their honest and interesting presentations, Mari Tyster the Deputy CEO of Municipality Finance Plc (MunFin), and Leena Mörttinen, Director General at the Ministry of Finance (MoF).
Ms. Tyster (above photo) laid out the intense developments in reporting to the regulators since the beginning of the financial crisis in 2017 – her presentation was nothing but breathtaking!
MuniFin has only one important function and that is to finance investments to its owners, the Finnish municipalities. It does not take deposits nor does it provide any other financial services to others other than its owners. It is almost totally comparable to the State Treasury that covers the budgetary funding needs of central government. Both the municipalities and the State have taxation rights on residents and both have a clear position within the written constitution as the main legal entities of government that provide the basic services and security.
Even though MuniFin is not a normal bank, it is subject to normal banking regulations. It started reporting to the national regulator in the 1990’s and then in 2016 it began reporting to the supervisory regulator at the European Central Bank (EBC) in Frankfurt as its balance sheet grew above €30 billion.
Ms. Tyster pointed out quite correctly that because MuniFin is not a normal bank the EBC’s attempts to regulate it have been somewhat disorderly. She explained that coordination between staff members of the ECB has not ben well harmonised and new regulations are subject to opaque consultation processes making planning and procurement challenging.
The growth in MuniFin’s staff has exploded because of these regulations – in 2007 they had 95 staff now 154, even though activities have remained the same. Reporting has required hefty investments in IT software and consulting resources.
The concentration of accounting companies with the big four combined with the requirement to alternate accounting companies creates conflict of interest situations.
Finally the payments made to regulators have also ballooned.
Even though the work is challenging there happen to be clear benefits,“…the biggest advantages are that development work on risk management and the accompanying investments in IT solutions move faster… and having ECB as the regulator also attracts positive attention for MuniFin with investors…” Says Ms. Tyster.
Leena Mörttinen (above) from the MoF spoke about the speed of change in the global markets, the speed of increased consolidation of the big banks and the new natural monopolies of the big tech companies like Amazon, and Facebook that dominate markets.
We know that these companies avoid paying taxes and have disrupted smaller companies. Governments fold to their demands which is ridiculous when they reap huge profits and destroy local jobs with reckless actions that are possible because of these benefits.
She spoke about the need to break up these natural monopolies…
She spoke about the downturn facing global markets, and that brought her to the dilemma between Monetary and Fiscal Policy. Her conclusion was that the ECB’s job is to maintain price stability, and it is not their job to finance governments or spruce up the economies of the Eurozone with zero or negative interest rates. That work should be performed by governments using fiscal policies with independent regulators watching over their banks.
Interestingly she did not talk much about the role of banks for the health of the real economy. Because of the new global regulations, banks are lending less of their balance sheets to companies. They prefer the real estate mortgage loans where risks are lower, less capital is needed and the fees are higher. Banks are not as important at they once were for the nation as their balance sheet size suggests.
Her main conclusions were centred on the explosion in the power of the Big Techs that have broken down old systems and created a whole new pack of threats – threats like Hacking of key infrastructure, high speed data transfers, new work organisational structures, new global tribes of workers, the geographical displacement of industry, the rise of “intelligent” robots and AI, and the changing roles of human beings.
In this light she sees that climate change, the increased role of geo-political risks (foreign meddling in national elections) and the breakthrough of technology means that the worst storms are ahead. Local national regulations have reached the end of the road and we must think globally.
The best defence for facing these threats means that we must accept change and do what it necessary and for that you need a strong economy – a strong balance sheet!
Somehow, there could have been a word or two about the importance of education… without understanding and knowledge, without a smart workforce, nations will go nowhere… but that was perhaps implied from this top civil servant that has few degrees in her pocket.
One of the final takes from this excellent event was the big question about data overflow. It appears that thousands of long reports are being collected from millions of different activities and funnelled into regulators official systems. Does anybody really understand and react correctly to all this information.
Based on the many crisis we see every ten years and based on the fact that many of the men and women in the regulators are political appointees, one wonders if we, the populations, are living under a sense of false security.
Ms. Tyster mentioned that the Big Four accounting firms in Frankfurt are needed to explain these regulations to bankers who are normally fairly smart, (and bankers are the people who are always running ahead of the regulators). The question then is who are the folk who must review and react in time to stop the next crisis?
One can have serious doubts that the right actions will be taken in time based on past experience – and especially now that the world is far more complex with these new oceans of SQL data.
