Presentation on theme: "Integrating Socio-Economic Rights into the Regulatory Architecture of the Financial System Mary Dowell-Jones, Ph.D. Research Fellow Institute for Human."— Presentation transcript:
Integrating Socio-Economic Rights into the Regulatory Architecture of the Financial System Mary Dowell-Jones, Ph.D. Research Fellow Institute for Human Rights and Business
Overview: 1. Overview of the Financial Crisis 2. Limits of Human Rights Engagement with Finance 3. The Crisis – A Network of Interlocking Causal Factors 4. Potential for a Human Rights Response? 5. Moving Forward – A Strategy for Integrating ESR into the Regulatory Architecture
1. Overview of Financial Crisis: 1. Most Critical Banking Crisis Since the Great Depression Estimated losses of $3.4 trillion Largest bankruptcy in history – Lehmans $660 billion + hedge funds, insurers Government orchestrated rescues including AIG ($177 billion), Citigroup ($326 billion), Bear Sterns, Northern Rock Unprecedented Government bailouts – roughly $6.6 trillion across major economies Global financial system only survived thanks to Government intervention
Human Rights Impacts Major impacts of global recession on ESR: Global Jobs Crisis (ILO): million more unemployed in OECD 2. Over 600,000 a month lost jobs in USA in Q million migrant workers unemployed in China 4. Thousands of jobs lost in export industries after sharp contraction in world trade post-Lehmans An Emergency for Development (World Bank) 1. Fall in remittances/loss of migrant worker jobs 2. Fall in State revenue/State spending for ESCR 3. Rise in poverty – 53 million more people estimated to be living on less than $1.25 a day (World Bank)
Human Rights Impacts (cont) Impacts in developed economies: 1. Rise in personal/corporate bankruptcies 2. Rise in foreclosures/loss of homes 3. Massive losses on pension funds 4. Rise in food insecurity (USA) 5. Sharp drop in government revenue/tax takes Long term: 1. Explosion of government debt – likely sharp spending cuts 2. Impaired bank balance sheets – era of sluggish lending/growth 3. Threats from inflation/new asset bubbles 4. Health/education impacts of reduced incomes for very poor
2. Limits of Human Rights Engagement with Finance Human rights engagement has been issue-specific: Corruption/Transparency e.g. EITI, Wolfsberg Principles Project Finance e.g. Equator Principles Ethical Investing e.g. UNPRI, UNEPFI Divestment Campaigns e.g. Burma Even Ruggie Consultation seemed limited: Financial Companies at least one step removed from the human rights impacts of the business activities that they enable with their funds
Limits of HR Engagement: Focus on defined areas where impacts are visible and easily mapped to financial activity e.g. project loan Focus on familiar human rights territory where HR issues are well understood e.g. funding mining projects that impinge upon rights of indigenous people/ companies with bad labour rights Based on prevailing legal approaches to socio-economic rights i.e. where direct causality/responsibility is required between act/actor and victim/violation BUT this approach does not fit the complexity and interconnectivity of 21 st century finance. These initiatives do not offer a template that can be extrapolated to address the crisis. Because: Causality is too diffuse, underlying issues too technical. Way beyond the scope of existing approaches to ESCR
3. The Crisis – A Network of Interlocking Causal Factors Global financial system is now a huge influence on economic conditions and socio-economic rights Hugely complex & profoundly interconnected Financialisation of world economic space over last 20 years: World Stock Market cap. now $55 trillion Daily FX trading in US alone = $660 billion up 44% in 3 years Derivatives exposures $1000 trillion+ In contrast – world GDP now $60 trillion Credit Default Swaps – estimated $60 trillion in 2007
3. The Crisis – Causal Factors: Mutually Reinforcing Financial Factors: 1. Securitisation/explosion of credit derivatives ($1.4 trillion of US subprime mortgages) 2. Rise of the shadow banking system/off balance sheet vehicles 3. Over-reliance on credit ratings outsourcing risk 4. Global search for yield 5. Fundamental failings of risk management 6. Leverage/under-capitalisation of banking system 7. Moral hazard + lack of understanding of dynamics of 21 st century finance System-wide abdication of responsibility
The Crisis – Causal Factors: Compounded by Macroeconomic Factors: 1. Low interest rate environment 2. Arrival of China into world trading system, suppressing CPI 3. Build up of enormous FX reserves in Asia + their recycling into treasuries – de facto currency pegs 4. Huge trade deficits/surpluses – Asia produced, the West consumed 5. Massive build up of debt in Western economies – personal (consumption), corporate (LBOs), financial (leverage) government (war financing)
4. Potential for a Human Rights Response? There are significant underlying problems with SE rights themselves: A legal instrument with economic foundations BUT Has been approached as a legal project, e.g. efforts to delineate layers and typologies of obligation Macroeconomic issues have been downplayed except as issues to argue against Focus on economic neutrality crystalised economic decontextualisation of ICESCR Result: No foundation of technical macroeconomic/financial content of ESCR to work from.
Potential HR Response? Result: 1. Debate among HR lawyers has tended to focus on critique of failings of neoliberalism 2. Discussions of type of State we need 3. Proposals to simply insert a HR clause into Basel II Capital Adequacy Accord 4. Lack of engagement with technical financial detail or visibility of HRs in regulatory reform debates 5. Limits of due diligence
Potential for a HR Response? Is the Crisis a Human Rights Issue? Does it Make Financial Regulation a human rights issue? Yes: crisis has had a devastating impact on human rights worldwide, as have previous crises. State obligations & Ruggie Framework No: Answer isnt so obvious. Regulatory issues are highly technical and arguably well beyond the scope of existing notions of human rights. No clear template for integration.
5. Moving Forward – A Strategy for Integrating ESR into the Regulatory Architecture: Centered on complex international accord Basel I & II Purpose: to ensure a sound and stable financial system Does not mandate or monitor social outcomes of market processes. Why? Heavily quantitative/mathematical models Probability theory/statistics Assumes efficient, self-correcting markets.
Risk Management: Fundamental to financial regulation & the way the financial markets work Centered on probability estimates for loss distribution Works on the assumption that by averaging market data you can predict future losses Uses normal market i.e. strips out tail risk Failed abysmally to warn of crisis
Failings: Highly pro-cyclical Drove markets higher by reducing risk numbers Strips out reference to socio-economic context Only looks at market data, very narrow basis of analysis Embeds complacency about actual risk Appears highly sophisticated, but very limited picture of markets Produced an under-capitalised financial system that was critically vulnerable to systemic problems Compounded by fact that most financial actors were using the same regulatory-required techniques A key lever of interconnectivity Produces a one-way market
Potential for Integrating Human Rights and Risk Management Broadening notions of risk to include ESR factors What form could this take? Move beyond formulaic mathematical models that do not reference market context i.e. human factors Are inherently reductive of social processes How? Build work that demonstrates that socio-economic rights and the goods they represent are central to value, risk and pricing. Currently largely ignored. Return to qualitative, more contextual understanding of markets, beyond mathematical thinking
Build human factors into finance E.g. Subprime mortgage boom Over $1.4 trillion in mortgage origination between Huge change in fundamentals of underlying market Risk management methods ignored this by focusing on VaR or credit ratings – historic loss figures No effort in banking system to look at details of what mortgages were being sold to who and whether they were affordable Huge disconnect between social reality and financial vision Enormous human rights consequences & enormous financial losses
Emerging Markets Huge structural poverty/human rights issues ignored by financial thinking Tendency of investors to overestimate growth prospects by ignoring institutional, legal, political, historic, social factors. Focus instead on rising stock markets/macro indicators. Inequalities in fact often cemented by economic growth captured by elites, rather than addressing it. Econ/financial models assume the opposite. Tendency of EM to large boom and bust cycles. Pay more attention to the unique socio-economic, institutional & historic characteristics of each country. Risk needs to be informed by broad assessment of HR reality. HRs benefited by better risk management.
Commodities Development of commodities as an investable asset class Huge pressure on human rights from affordability of basics like food, fuel and heating oil No visibility of that reality in financial analysis, or of financial factors in HRs analysis – even SR on right to food focused on supply constraints and renewable fuels But major driving factor has been use of commodity futures for investment/returns Risk management would merely look at averaging historic price data and volatility to assess potential for loss. Would not investigate structural reality of the human impact of prices. Enormous pressure on HRs. No risk-based constraint.
Conclusion Financial crisis has opened up debate on HR and financial system No quick fix for failing financial system, nor for human rights BUT risk management weaknesses offer significant opportunity Just a starting point. Need to develop much more clarity prior to regulatory incorporation of HR standards Workability essential
Institute for Human Rights and Business Financial Crisis and Human Rights report: Available on website late March/April