Responsible Investor

The need to transform markets: an open letter from the Network for Sustainable Financial Markets

Investor think-tank: the views of savers “have not been aired” in the credit-crunch debate.

The crisis in our global financial system has elicited comments and actions from bankers and regulators but the concerns of ordinary savers – those who entrusted their retirement hopes to pension funds, insurance companies and fund managers and who have been (and will be) amongst the biggest losers – have not been aired. In one way this is understandable, given the pace and complexities of the debate. But the consequence is that bankers are assumed to be speaking on behalf of the investment system as a whole and this is clearly wrong. The Network for Sustainable Financial Markets seeks to interject in the debate the views of long-term investors who, of all the players in the financial system, best reflect the needs of ordinary savers. The Network maintains that the financial system failed because insufficient attention has been paid to sustainable wealth creation. We fear that the dominant response to this predicament – politicians and regulators taking a reactive and ad hoc approach – will continue and compound this mistake.

In particular the Network worries that:

1. Throwing central bank liquidity after a problem partly caused by too much liquidity can only provide a temporary bailout to a financial system that falls into crisis too often, without addressing why these crises occur.
2. While greater transparency may often be the right solution to corporate governance failures, calling for more transparency and uniformity in risk management tools within financial institutions will not, alone, solve the problems we face. Similar calls have been made after every banking crisis over the past 20 years, have been implemented to little avail, and may even promote short-term, pro-cyclical and herd-like behavior.

1. The problem of wrongly sized and directed incentives, an important root cause of why we are in this mess in the first place, is not yet being addressed head-on.

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