Banking Standards Apple Pie

The Parliamentary Commission on Banking Standards published its 571 pages and its chairman, Tory MP Andrew Tyrie, hopes ‘the higher standards it advocates will help revive the banking sector and the UK generally’. ‘This is not,’ he assures us, ‘a bank bashing report.’ Indeed so. It is as supportive of banking, the City and its financial activities as such a report could be, while talking the language of reproof and proper correction. Its disapproval of massive bonuses, especially those being paid for failure, is given full voice. But proposed substantive action is limited. The extension of deferred bonus payments with easier “clawback”, seems unlikely to make much difference.

A much repeated complaint in the report, especially of people at the top, is the lack of personal responsibility and accountability. Those responsible for the decisions and behaviour which led to the sector’s failure have continued to be rewarded with massive bonuses and pensions. To address this the report recommends top appointments having to be authorised by the regulator who will identify specific responsibilities. Would that make any difference? Would the regulator have rejected the appointment of Fred Goodwin or Bob Diamond. Or any other likely incompetent?

The other main proposal aimed at increasing personal accountability at the top is the invention of a new crime: ‘reckless misconduct in the management of a bank’. It is admitted this might be difficult to prove, but prison is promised for the guilty. That will no doubt cause lawyers much mirth …. As noted repeatedly on this site, law is already in place to limit the activities of bankers, auditors, traders and corporate bosses, but it is simply ignored. The failure of will to enforce existing law must be overcome. The report ignores this problem, merely suggesting an addition to the list of laws which will easily be ignored.

The reality, that the commission dared not address, is that the banks that did the damage are not only too big to fail, but too big to control. The top management cannot know what all their staff are doing and so cannot bear real personal responsibility. Rogue traders and bad apples arise because the system encourages them and does not control them. The deregulation which enabled retail banking to combine with investment banking created the ‘too big’ banking corporates focused on maximising shareholder value and taking unmeasured risk to achieve it, only punishing the apparatchiks when anything goes wrong, relying on the tax payer to pay when problems get ‘too big’.

The obvious first step to solving the ‘too big’ problem would be to re-enforce separation of retail and investment banking. That would have the added benefit of separating the two cultures. But the City won’t countenance such an infringement of its freedom. ‘Electrified ring fencing’ is as far as they will go, and that only so long as its meaning remains opaque.

Combining investment banking with retail has resulted in funds, which would otherwise support the real economy, being sucked into the far more profitable, but risky and bubblesome financial products which are not merely opaque but, as noted more than once on this site, may be even imaginary. Reducing this profitable but dangerous activity could be achieved by making opaque financial products illegal and imposing a financial transactions tax to slow down and limit ultra-fast automated trading. But the City would be unlikely to countenance such limitation on its freedom, and politicians fear to act against City wishes, despite the existence of international support for such initiatives.

The Commission’s report has plenty of aggressive sounding rhetoric, but lacks real substance. That will make it easier, after the initial media impact, for the report to be shelved with barely a ripple.

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