Integrity: The Foundation for a Strong Financial Sector

Published on 16th January 2018

The Oxford Dictionary defines integrity as “the quality of being  honest  and  morally  upright  and  firm  in  your  moral  principles.” Traditionally, integrity of the financial sector relates to financial institutions and  affiliated  persons  and  institutions’ adherence  to  standards  that  are  rooted in laws, regulations, guidelines and recommendations issued by the supervisory and/or regulatory authority. Financial sector integrity also relates to  codes  of  conduct  drawn  up  by  the  financial  institutions  or  sector themselves, and socially acceptable unwritten rules of conduct.

The  financial  sector  is  a  critical  component  for  economic development  in  any  country.  It  is  the  lubricant  that  oils  the  wheels  of  an economy,  contributing  to  prosperity  and  wealth  creation  through  the provision of financial resources. Governance is therefore a critical issue for the financial sector as they operate in a substantially regulated environment.

The Global Financial Crisis

I would like to set the tone on the integrity of the financial sector with a brief reflection on the recent global financial crisis. The global economy is currently going through its deepest crisis since the Great Depression of 1929.  Around the world, politicians, economists, policy analysts, investors, bankers, etc., are engaged in discussions on the impact of the crisis on their respective countries and global economic growth.

The financial crisis, by common consent, broke in summer 2007 against a backdrop of strong global economic growth. That growth had been fuelled by what Alexander termed as a “financial super highway,” linking east and west -which saw the huge savings of the emerging economies in Asia, Russia and the Middle East invested in the West.

The influx of investment increased the price of assets and gave rise to ever cheaper  credit,  as  banks  gained  the  confidence  to  lend  more  against  the collateral of rising property prices. As interest rates increased in 2006 and 2007 in the United States, many of the debtors began to default, putting at risk the value of all housing loans.

Thus,  as  the  so-called  “sub-prime”  borrowers  in  the  United  States  started falling behind on their mortgage payments, the holders of these mortgage-backed  securities  started  to  question  just  how  exposed  they  were  to  the increased  risk  of  default  of  hundreds  of  billions  of  dollars  in  “sub-prime” loans. And as they looked closer, these institutions found that they could not even quantify  their  level  of  exposure  because  of  the  proliferation  of  complex securities and derivatives.

First  designed  to  spread  risk,  these  derivatives  in  fact  increased  the systematic risk inherent with bad debt, firstly by fooling lenders into thinking they   had   avoided   such   risks   altogether,   and   secondly   by   reducing transparency and making it unclear just how exposed individual banks were. Banks announced over half a trillion dollars of sub-prime and related losses, but the growth in securitization made it unclear who would bear the cost at the end of the chain. The failure of Lehman Brothers in September led to a collapse in confidence and almost every company or institution parked out deposits from banks perceived as even marginally at risk.  This  in  turn brought  the  global  financial  system  to  the  brink  of  collapse,  sparking  the worst global financial crisis for generations.

What really triggered the current world financial crisis? The answer is simple: a  lack  of  confidence  in  the  global financial  sector,  stemming  from  the significant  depression  of  its  integrity.  In fact, all markets are built on confidence, and the financial market is especially dependent on confidence. Confidence  in  every  layer  and  link  in  the  system:  confidence  in  reliable figures  and  sound  people,  and  in  well-enforced  laws  against  fraud  and corruption. The lack of confidence in the global financial sector points to the failure of the supervisory and regulatory authorities to provide effective leadership.

I think that leadership is the sum of two vectors: competence and integrity. Competence relates to your specialty, your know-how, whereas integrity relates to your identity, your character, your attitude.

In a nutshell, leadership is about skills and integrity. When companies and people  get  stuck,  they  tend  to  apply  more  steam,  i.e.,  more  competence, the very tool that got them into the trouble in the first place.

The fact is that when you are stuck, you are not likely to make progress by using competence as your tool. Instead, progress requires commitment to two  things:  first,  you  need  to  dedicate  yourself  to  understanding  yourself better; second you need to change your habits of thoughts, how you think, what you value, how you work, how you connect with people, and what you expect  from  life.  In other words, progress requires commitment to two things: integrity and skills.

I  would  like  to  believe  that,  perhaps  when  the financial  sector grew in  size,  and  volumes of  business  became complex  in the  eighties  and  nineties,  leadership  in  the  sector  thought  that  building human capacity and acquiring quantitative skills in derivatives, securitization, etc., would make the management of the complexities more effective. The issue  of  integrity  which  should  have  been  at  the  core  of  financial  sector management was not stressed. The human resource function focused on the recruitment of  young  people,  talented  in  quantitative  methods  and  very skilful in financial engineering techniques, securitization, swaps, etc., leaving the  identity  and  values  of  the  people  unattended.  The  failure  of  the leadership to first allow integrity to foster growth and stability of the sector and  then  utilizing  skills  and  competencies  to  achieve  efficiency  and effectiveness could be the prime cause of the global financial crisis.

Generally,  the  financial  sector  supervisory  and  regulatory  authorities  have the administrative, legislative and institutional power to effect changes in the industry  and  also  the  capacity  to  generate  and  align  resources  to  support their  discourse.  Unfortunately, the authorities have not utilized the power and resources at their disposal to define the dimension, growth trajectory, and stability of the financial sector. In many instances, when circumstances changed, the financial sector was unable to flex and adapt. The institutions and  systems  have  been  left  to  become  captive  to  the  industry  and  are therefore   unable   to   effect   and   sustain   the   required   changes.   This underscores  the  length  of  time  it  is  taking  the  global  financial  sector  to transform, despite the existence of plethora of international standards and codes of conduct.

Integrity of the Financial Sector The financial sector needs to demonstrate that it has embraced integrity as its cornerstone. It should also realize that sound conduct goes beyond strict compliance with the laws and regulations. The laws and regulations reflect the prevailing social norms and values. Since regulations codify norms and values, it is vital that the financial sector keeps abreast with the changing views in the society on what integrity involves and what type of conduct is worthy of confidence.

Solvency and stability of the financial system, accountability and transparency are also crucial for maintaining confidence in the financial sector. The sector also needs to observe business integrity in a way that the society finds admissible and acceptable.

Monitoring and safeguarding business integrity is the job for the supervisors. Here   I   am   referring   to   integrity   of   supervision:   personal   integrity, organizational integrity,  relationship  integrity  and  market  integrity.  If the supervisory authorities do not target risks that have the potential to affect activities of financial institutions and harm their reputation, then the integrity of supervision would be grossly undermined.  For financial institutions, the personal integrity of the leadership, i.e., the directors in the broad sense, is crucial for business integrity as it is with the conduct of individual employees.

The  trustworthiness,  sense  of  responsibility,  law-abidingness,  honesty, uprightness,  etc.,  of  directors  and  those  who  determine policy  should  be beyond doubt. Highest  standards  of  integrity  are  also  required  from  the  employees  of financial  institutions.  Sharp  awareness  of  integrity  at  all  layers  of  the organization,  not  only  through  rules  and regulations,  but  also  through training sessions on integrity at the work place, is also crucial. Such sessions lend the employees greater insight into the integrity dilemmas that may arise in  their  work  and  also  offer  them  the  opportunity  to  discuss  integrity  and what it means for the growth and stability of the financial sector.

Besides   the   integrity   of   supervision,   the         supervisory and regulatory authorities should also concern themselves with the integrity of the entire financial sector. Here too, integrity goes beyond compliance with statutory rules and regulations.  Unsound conduct can damage the sector as a whole, even if no violations have occurred. Wrong incentives, such as transaction-related bonuses, could induce sound people working in sound companies to exhibit behaviours that impact negatively on market integrity generally.

The  issue of  integrity  of  the  financial  sector  also  needs  to  be  tackled internationally. This is because globalization has removed the borders in the financial sector. Since financial risks have become marketable and borders between countries have become blurred, financial crises and the associated losses  are  spread  quickly  and  more  widely.  Countries  not  only  reap  the rewards of globalization  but  also  the costs, because  everybody is  affected when  things  go  badly  wrong.  That  is  why  there  is  the  need  for  global discussions and actions on matters such as integrity of the financial sector.


In conclusion, we need to recognize that the financial and economic crisis confronting the world today is in large part the failures of national and cross-border regulatory and supervisory regimes in assessing and managing the build-up of risks in financial institutions and systems. This crisis  was  the  result  of  the  failure  of  the  leadership  to  drive  change  by inspiring  people,  institutions,  and  systems  to  do  new  things  fast  and  thebelief  that  the  solution  to  the  financial  crisis  lies  in  complex  mathematical permutations and secrecy. The absence of effective leadership in the global financial  sector  undermined  the  sector’s  integrity,  which  in  turn  eroded confidence in the institutions and systems.

The  Bible  says  in  Psalm  78  verse  72:  “And David  shepherded  them according  to  the  integrity  of  his  heart,  and  guided  them  by  the skilfulness of his hands.”  Integrity and skills are critical and indispensable traits of effective leadership. It is integrity that FEEDS the people whereas skills LEAD the people. Integrity is therefore required to foster growth and stability before skills can follow to achieve efficiency and effectiveness. Integrity should therefore be regarded  as  the  foundation  for  a  strong  and  sustainable  financial  sector.

By Hon. Dr. Kwabena Duffuor, Minister for Finance and Economic Planning

British Council Offices, Accra

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