The Catholic Church on Thursday issued a blistering critique of the global financial industry, arguing that not enough has been done in the wake of the 2008 housing market crash to stop unethical, risky and reckless behavior.
In a 10,000-word document approved by Pope Francis, the Vatican attacked everything from CEO compensation to the rise of the payday lending industry. It said derivatives, the complex securities contracts that fueled the market meltdown, were still “a ticking time bomb."
The document said the crisis presented an opportunity to move toward a world economy that is “more attentive to ethical principles, and a new regulation of financial activities that would neutralise predatory and speculative tendencies and acknowledge the value of the actual economy.”
But that didn’t happen, despite “many positive efforts at various levels which should be recognized and appreciated,” it said.
“On the contrary, the response seems at times a return to the heights of myopic egoism,“ the document said. It took aim at “an inadequate framework that, excluding the common good, also excludes from its horizons the concern to create and spread wealth, and to eliminate the inequality so pronounced today.”
Though not exclusively directed at the U.S., the Vatican’s criticism seems to suggest that the 2010 Dodd-Frank Act — the most sweeping overhaul of American financial regulations since the Great Depression — did not go far enough. That law was intended to reduce banks’ reliance on debt, increase their cash on hand and improve their ability to measure risk.
The Vatican’s statement also comes as the House of Representatives prepares to approve a major bank deregulation bill next week. The legislation would free dozens of some of the largest lenders from complying with key pillars of Dodd-Frank, though it’s mainly intended to benefit the smallest banks.
“[B]esides the fact that most of its operators are singularly animated by good and right intentions, it is impossible to ignore the fact that the financial industry … is a place where selfishness and the abuse of power have an enormous potential to harm the community,” the Church said.
The Vatican laid out a litany of areas for concern, including derivatives. The religious institution acknowledged that a derivative — a contract that derives its value from an underlying asset — can be used for responsible purposes, such as balancing out the risk of a related investment going bad.
But the further a derivative contract gets from being tied to the actual underlying asset, the harder it is to fairly assess the security’s value, the Vatican said. “All these have encouraged the rising of speculative bubbles, which have been the important contributive cause of the recent financial crisis,” it added.
Dodd-Frank required a larger amount of derivatives contracts to be overseen by a third party, known as a clearing house, among other reforms.
The Vatican also targeted predatory payday lending, executive compensation that rewards officials for creating profits for shareholders but not for increasing the economic health of their companies, tax evasion and securities that allow financial institutions to make risky loans and then bundle them into assets that can be spread across markets.
The Church called for greater transparency, so consumers can make more informed decisions in their investments, and criticized financial advisers who put their compensation considerations ahead of customers’ best interest. A federal court recently struck down an Obama-era rule that would have required brokers to put their clients’ best interest first when offering retirement advice.
It also urged financial institutions to take into account the benefits for poorer individuals and the broader economy when making business decisions.
Finally, it suggested consumers should “vote with your wallet.”
“This is in reference to voting daily in the markets in favor of whatever helps the concrete well-being of all of us, and rejecting whatever harms it,” the Vatican said.