It is very common nowadays to hear politicians and regulators claiming that banks are only interested in profits and greedy bonus and that banks do not give enough importance to their customers’ interests and relegate them in favour of their own interest and profit. It is fascinating to see how easily politicians argue that the whole system is flawed every single time a bank behaves (according to these same politicians, but still arguable) below the level they consider adequate.
However, asking banks to put their customers’ needs before their own is superfluous. Banks know very well that they need to satisfy clients’ demands if they are to survive. Clients’ needs and they protection of the bank's reputation are always present in the minds of anyone working at a bank, from top managers to junior employees. In this sense banks are not much different from any other company in any other sector. In a properly established market system banks and financial institutions would, most of the time, behave in such a way that both parties are satisfied: banks provide a product or service for a price and customers are willing to pay for it because what they receive is worth the price. Banks are very aware of this trade off. However, we do not live in a free market system, and if sometimes banks do not deliver for customers, it is mostly due to government interference, in one way or the other, and not in the willingness of banks to please their customers.
Banks, as any other company, know very well that if they do not provide value for money customers will stop purchasing from them and will go to another bank across the road. All companies compete for customers and strive to provide good products at attractive prices. The financial sector is no different in this regard. If politicians really want a financial system where banks produce what customers really need and want, there is no better way than implementing a purer market system where banks that do not deliver value for money will be disregarded and disappear. Of course, as in any other sector (including governments), there are certainly some individuals who may sometimes behave in a way which is not in their customers’ interest and which is solely in their own personal benefit, even if it implies committing illegal activities. However, these are sporadic cases though attracting huge attention. Politicians normally neglect that banks are naturally inclined to care about their customers and will use any wrongdoing as an excuse to ramp up control.
But it does not stop there. For some politicians, the financial sector is also “strategically important”, “essential”, “special” or whichever other terminology they think of to argue that it has an additional function well beyond that of providing for their customers. It is not uncommon to hear politicians and regulators saying that the financial sector has a “social responsibility” that it cannot neglect. Some go even further and say that banking must pursue the ghostly “public interest”. However, these are not a simple concepts. Public interest is not just one but many, as different groups of individuals always have different and sometimes opposed interests. In reality, every time a politician or regulator claim that banks have a social responsibility to pursue the public interest, what they really are saying is that more intervention and control is needed. What politicians really mean is that banks should act in a way which supports their particular view of the “public interest” or their particular level of care for their clients. And then is when real intervention begins.
In some countries governments will simply seize banks and take the steering wheel themselves. However, in so-called developed countries politicians are more sophisticated. First, governments will pass laws to put the banking system on a specific track so that certain activities are discouraged while others are promoted. Secondly, a powerful regulator will be created to supervise and direct individual firms, or the system as a whole, in a specific direction determined beforehand. Hence, the financial sector becomes a puppet of the government. Politicians in developed countries know very well that direct control of banks is not an option. The country will be seen as an authoritarian regime and therefore discourage investment. Also, they know that private companies are better run privately and without political intervention. Therefore, they favour using this stealthy and indirect control instead of explicit intervention.
It is always good intentions that cause the worst catastrophes. Simply, look at the recent financial crisis created by the noble intention of providing affordable housing for everyone. However, regardless of how honourable politicians’ intentions are we cannot use the financial system as puppet for politicians to pursue their political agenda. If we are to avoid banking failures and promote a healthy financial system where customers receive what they want at affordable prices we should stop political interference and furtive control of banks. Unfortunately, the world is moving in the opposite direction.