The UK Parliamentary Commission on Banking Standards, set up a year ago in the wake of the Libor scandal, reported this week.
Among the targets of its criticism were UK regulators enslaved to a process so flawed it all but guaranteed big risks would be missed and ensured scandals such as mis-selling assumed vast proportions due to the slowness and inadequacy of their response.
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| Andrew Tyrie, chair of the Parliamentary Commission on Banking Standards |
“Supervisors need to be close enough, and have a detailed enough understanding, of businesses to take swift decisions based on up-to-date information, rather than belated actions with the benefit of hindsight,” says the committee. Does the same apply to the committee itself? It has certainly indulged in some interesting ideas – for example, that the government amends the UK company act to prioritize financial safety above shareholder interest in the case of banks.
But don’t banks already have to prioritize safety so that shareholders don’t get wiped out? Does the committee hit the mark?
This, let’s remember, is a committee reporting five years after the financial crisis, recommending that the government should now hurry up and study whether to break up RBS into a good and bad bank, and have a plan worked out certainly before the end of this year.
One of its other key recommendations, on overhauling the structure of UK banking, is that “the government immediately establishes an independent panel of experts to assess means of enabling much greater personal bank account portability”.
There’s the usual muddle in the committee’s findings that you might expect. It calls on the government to take swift and decisive action to place RBS in a position where it can make a full contribution to a better functioning market and lend more to businesses.
In the next breath it demands the government relinquish political control over decisions about the leverage ratio, which the committee calls “the single most important tool to deliver a safer and more secure banking system”, and leave this to regulators.
Any regulator worth his salt might have told the committee that the quality of assets banks are leveraging on to their balance sheet is more important than the degree of leverage. They would also say the leverage ratio is just one tool to be used among many to make banks safer.
The sub-text is that the committee thinks the UK Treasury is going soft on the banks by talking about a leverage ratio of 3% or under. The Treasury might argue that is precisely because it wants to get the banks lending again, the committee’s first key demand.
And if either the committee or the Treasury spent much time at the UK banks, they’d find them pretty keen to lend and put on earning assets, given their high capital and replenished liquidity, but struggling to find creditworthy customers who want to borrow.
But perhaps this is asking too much. After all, one of its prominent members only found his way on to the committee by virtue of a seat in the House of Lords still reserved for the leader of a minority religious sect, counting perhaps 2.5% of the UK population among its adherents.
These are a group who recently banned women from holding senior management positions in their organization. So there’s a certain irony when the commission asserts, without supporting evidence and as a matter of apparent faith, that “more women on the trading floor would be beneficial for banks”.
It’s easy to scoff at Andrew Tyrie’s commission and most bankers are doing so, but it would be unwise to dismiss it out of hand. It has some recommendations, which, if they find their way into law, will make life even more uncomfortable for senior UK bankers than it has become in recent years.
The committee recommends a new approach to regulation and enforcement whereby all key responsibilities within a bank must be assigned to a specific, senior individual and, even when as a practical matter these are delegated, or subject to collective decision-making, those responsibilities will nominally remain with the designated individual.
It then proposes that in the event of a bank failure those responsible bankers must be able to demonstrate they took all reasonable steps to prevent or mitigate the effects of a specified failing, switching the burden of proof away from the regulators and on to the bankers to prove their innocence.
The consequences of not being able to could be severe because, according to the committee, “a new criminal offence will be established applying to senior persons carrying out their professional responsibilities in a reckless manner, which may carry a prison sentence”.
Those recommendations, contained in a few short sentences, could probably provoke a library full of studies in response on UK law and natural justice. It’s hard to tell whether this was just Tyrie and co playing to the gallery, providing the “we’ll jail the bankers” headline the British public craved and getting themselves the lead slot on the BBC news homepage, albeit briefly, or might this become government policy and even law.
Is it legally justifiable or even possible to hold an individual nominally accountable for responsibilities that have practically been delegated and to reverse the burden of proof in criminal proceedings? Will this only apply to bankers, or to regulators as well, to executives of non-financial companies, dare one ask to parliamentarians?
In the short-term this will have one obvious consequence. The quest to find a new chief executive of RBS, which now clearly faces a long slog before eventual privatization, was already a tough one. It just got that little bit harder.
