Ronald Goseco l May 19, 2023 l The Manila Times
LAST quarter, the biggest banking collapse of a US bank since the 2008 global financial crisis played out as it succumbed to a classic bank run. Silicon Valley Bank customers frantically withdrew their money before US regulators intervened. The bank failure panicked markets and led to more trouble as weaker banks struggled because of a conundrum of soaring interest rates and self-inflicted ethical issues. Just a week later, Signature Bank shut down while a third bank — First Republic Bank — was rescued. Soon after, the first major threat of global significance was averted by the takeover of Credit Suisse by UBS.
According to US Treasury Secretary Janet Yellen, “that could turn this into a source of significant downside to economic risk.” Goldman Sachs then said that this growing stress has boosted the odds of a US recession within the next 12 months. The world’s second-biggest economy, China, also sputtered, and the Chinese central bank recently cut their reserve requirements to keep cash flowing. All these events seem to be signaling the start of a global recession.
This much heralded 2023 recession is turning out to be the most anticipated event of the year. More than a year ago, many economists have been predicting that the world should be in recession by now. It seemed like a sure thing because years of virtually zero interest rates ignited the capital markets and created a global housing bubble. To deal with the spike in inflation, the US Federal Reserve (Fed) began to increase the Fed funds rate — the rate banks lend to each other overnight — to cool demand for goods and services to bring down inflation. Since March 2022, the Fed has hiked this rate from.25 percent to 5.25 percent this May. Central banks around the world followed suit to bring down inflation in their own countries and stabilize markets. The Bangko Sentral ng Pilipinas hiked its own overnight lending rate from 2.5 percent last March 2022 to 6.75 percent this March. Perhaps not as aggressive as the US Fed but certainly enough to cool down both the equity and credit markets. Despite this turmoil, the global economy seems to be keeping its resilience and is kept afloat with reasonably high employment and by persistent consumer spending. It may not be over yet though and the bearish predictions could still unfold if not this year, perhaps next year.
How did ethics and morality play out in this? It became very clear in the end, and specifically in the case of Credit Suisse, that ethical principles were violated, and these eventually led to its downfall. Their failings included a criminal conviction for allowing drug dealers to launder money in Bulgaria, entanglement in a Mozambique corruption case, a spying scandal involving a former executive and a massive leak of client data to the media. It engaged with clients that other banks shunned like Lex Greensill and the failed investment firm Archegos Capital Management where it lost billions of dollars. According to The Guardian, the leaks revealed massive failures of due diligence despite repeated pledges over decades to weed out dubious clients including a reported human trafficker in the Philippines as well as corrupt politicians from Egypt to Ukraine. This eventually led to a loss of trust by its clients leading to unprecedented client outflows last year and its ultimate end this year.
Clearly, ethics and morality play a role in determining the failure or success of an enterprise. This will be a special topic that will be taken up in the 3rd P&A Grant Thornton Finex Academy Senior Finance Leadership Program that will start this May 25. This will be discussed in the module — Influencing Board Governance from the CFO Seat to be presented by lecturers from the Institute of Corporate Directors (ICD) and two Finex members. The entire program was carefully designed to ensure that participants get a solid technical grasp of essential topics needed by finance executives. These topics include key development needs across six key themes — Leadership, Governance, Sustainability, Technology, Business Partnering and People. The program will cover 12 sessions with six modules with each session running for three hours. Two-hour sessions will be conducted by institutional learning partners that also include the De La Salle University School of Lifelong Learning, Management Strategies, Roadmaps + Beyond and Benchmark Consulting with the third hour handled by lecturers from Finex. The program will provide a unique and holistic offering that will benefit participants as they advance their professional career and contribute to the success of their organizations.
It will be clarified in the program that ethics may not necessarily be equivalent to morality. Morality is characterized as personal and normative in nature and is guided by one’s personal convictions while the ethics definition of “good and bad” are distinguished by a certain community or specific social settings. An ethical philosophy known as Utilitarianism determines right from wrong by focusing on outcomes. It also promotes that the most ethical choice is the one that produces the greatest good for the greatest number without regard for moral guideposts. As confusing as it may sound, this is perhaps the main reason why many institutions fail. It is important that we all learn to distinguish when acceptable business or social ethical practices become threats to our own humanity or the environment. Only then can we ensure the sustainability of our future endeavors.
*** Ronald Goseco is a Finex Academy trustee but his opinions are his own.