June 26, 2019
In his book ‘Sapiens: A Brief History of Humankind’[1], historian, philosopher and author Yuval Harari explores how homo sapiens came to dominate the world. One of the reasons identified by Harari is our unique ability to cooperate flexibly in large numbers. A key requirement of such effective cooperation is the existence of myths. Myths are shared beliefs that connect individuals. They are held by large numbers of people without there being evidence that these beliefs exist outside their imagination. A good example of such a myth would be the nation state. Countries are taken for granted. We all wear silly hats and wave flags when our country wins a football tournament, but in fact countries are no more than a notion that people collectively believe to be true. In the course of human evolution, nations have only existed a few thousand years, the equivalent of less than a minute of injury time in a football match. Yet today, the world order is built around them.
This observation does not imply that myths are unimportant. On the contrary, the impact of myths on our lives is huge. Real wars are fought, and many people have died defending nations. Another myth that Harari points out, and probably the most successful of all, is money. Here too, the fact that it is a myth has not impeded its usefulness. It has become the most universal and efficient system of mutual trust ever devised, allowing the development of global trade networks and sophisticated modern capitalism. People’s belief in the myth of money has been extraordinarily influential in the creation of the world as we know it. But what exactly is money? In a tangible sense, money is a piece of metal, coloured paper or a line of code in a computer. Yet its value perception is much more significant and so well entrenched that it can even withstand great ideological differences; a case in point being the terrorist group ISIS. While battling Western interests, the group was more than willing to accept USD to pay its soldiers.
Harari states: “trust is the raw material from which all types of money are minted”. People accept money in exchange for providing goods or services because they are confident that they can, in turn, use that money to purchase the goods or services they need themselves. Fundamental for the strength of this myth is this mutual trust. Without it, that 100-dollar bill would be no more than a coloured piece of paper. Indeed, countries that have experienced hyper-inflation know how devastating the effects of loss of trust in currency can be. The trust we have collectively put in money is thus immensely powerful. Modern societies could not function without it. Central banks create billions of dollars from nothing to stimulate an economy, without anyone questioning whether the emperor is wearing any clothes.
With the myth of money being so deeply entrenched in our social fabric, societies have a strong interest to ensure that the delicate bond of trust is not eroded. Governments do this by strictly regulating the creation of money and by controlling its circulation. Banks too play a significant role in maintaining this trust. They represent the financial bridge between governments and the public, ensuring that money is distributed honestly and efficiently.
For banks the imperative to nurture the public’s trust has another, equally important dimension. Aside from the sector’s role in the service of preserving the myth described above, trust is also critical to each institution’s survival. As a result of their ability to create money far in excess of the amount entrusted to them by the public, there is an inherent instability in banks’ operations. This instability only manifests itself if the public’s trust in the institution is broken beyond repair. Fortunately, this is not easily done, even though we have seen several examples in The Netherlands, such as with Slavenburg’s Bank in the 80’s and, more recently, DSB.
So far, these isolated incidents have been contained and are not likely to cause much damage to the fundamental belief in the money myth. Interestingly however, we may have recently witnessed a signal that a single institution’s colossal neglect of its customers’ (and society’s) trust may generate ramifications beyond the firm to the extent of affecting the public’s trust in the money myth itself. The case of Den Danske Bank is indicative of how this might happen. As a result of an incredible lack of controls and oversight, hundreds of billions of dollars of criminal money could pass unhindered through this bank for many years. Subsequently, a Reuters article published in March 2019[2] reported that non-Danish investors had sold USD14 billion of Danish shares in 2018 as a result of a loss of confidence in the Danish banking system. Does this reaction reflect a fundamental erosion of trust that goes beyond an institutional level? A single incident may not constitute a trend, but governments are well advised to heed such signals with appropriate concern.
Whilst the strength of the myth remains strong, a red flag has emerged for the collective supervisory authorities. The international financial system is complex and deeply rooted interdependencies make for a fragile balance. Supervisory responsibilities should thus not be viewed with a parochial perspective where they only relate to individual institutions or the national financial infrastructure. The more integrated the global economy, the more important becomes international cooperation and alignment of policies whereby collective stability trumps national interests.
To the banks’ managements, the message is crystal clear. If you neglect the trust of your customers and the public at large you are playing with fire. Give your institution’s reputation for integrity the highest possible management priority because there is too much at stake, for everyone. Shareholders and Supervisory Boards need to take a more pro-active stance. Given the importance of trust for the survival of our financial system, any integrity violation should lead to swift and determined corrective action. In the case of Den Danske, this bank replaced its CEO and lost half of its value since its self-inflicted crisis. That is a good start. Others should follow.
Pieter van den Akker – June 2019
[1] Yuval Noah Harari, “Sapiens: A Brief History of Humankind”, ISBN 9780099590088
[2] https://www.reuters.com/article/us-denmark-cenbank-economy/foreigners-sell-danish-shares-after-danske-bank-scandal-central-bank-idUSKCN1R11GD