Banking governance; or maybe not

I’m an unhappy shareholder of Westpac. There will be a lot of shareholder wealth destroyed before this sorry tale is over.

By way of background, Westpac stands accused by the relevant regulator of failing in its obligations to identify and report suspicious transactions that could indicate money laundering or terrorism financing. In this case, it is alleged that millions of dollars and transactions have been made through the use of Westpac accounts and payments systems to launder money ultimately used to facilitate child exploitation. Further, it is alleged that Westpac has known of these transactions for several years and has not acted.

Immediately after these accusations were made public, there was a hit to the Westpac share price and there will be a heavy burden on future earnings as well. Internal resources will be burned belatedly putting right what should have been done years ago. Heads will roll at the board and executive level and rightly so. There will be disruption, internal dissatisfaction and finger pointing and probably heavy fines imposed. All of which will fall to shareholders to pick up the cost.

Assuming the allegations are true, (clearly the sharemarket believes they are) what more torrid example of a failure of governance by a bank could emerge? The board of directors is primarily responsible. It is the board that appoints the executive to implement strategy. Part of that implementation is to comply with the laws written on the statutes and standards of behaviour that a civilised society expects of it business leaders. The board should then supervise the executive is doing its job.

There are many complexities to understand before getting to the bottom of this mess. They will include how our system of banking is structured and how that can lead to perverse incentives among bankers. Government supported closed shop oligopolistic conditions mean competition is constrained. The taxpayer funded bank deposit guarantee and a paranoia in government ministers about bank failures lead to a ‘too big to fail’ attitude, hence arrogance and less attention to detail from the bankers. They don’t care enough because they don’t have to care. Meanwhile, the executive, presumably with the approval of the board, parades its virtue making politically correct noises about climate change, marriage equality, asylum seekers and so on.

Banking has very little to do with politically correct topics. Perhaps the real business of banking is too hard or boring for the directors and executives and they would rather focus on politics. If so, the sooner the clean out of senior executives and directors asleep at the wheel the better. It is also the perfect time for all financial services companies to take note and kick their own tyres. After all, I don’t see any reason to think that money laundering for child exploitation would be conducted only by people with Westpac accounts.