So banks are too big to fail. Are they also too big to regulate?
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Version 0 of 1. The broken culture of high street banking will take a generation to fix, according to a report this week. The thinktank New City Agenda calculated that over the past 15 years banks had incurred £38.5bn in fines and redress for the mistreatment of customers. Bank boards and their regulators acknowledge the need for change, and by all accounts this is a massive problem. So why should it take so long – and how can we force things to move faster? A few months ago, a dealer in old wine was given a 10-year sentence for misrepresenting the quality of the contents. A banker who misrepresented his or her product would not face anything like this penalty. Despite scandal after scandal, the absence of personal accountability persists. The size of penalties varies by regulator, but the unwillingness to punish the individual perpetrator does not. The message being sent from the regulators to the banks is: “Here’s the deal: we fine you a ton of money; no one goes to jail; no individual is named; and the best part – you can settle the bill with your shareholders’ dough!” True, in Britain the government is proposing new laws to make criminal behaviour a crime. But tools already in place remain untouched. The UK has long had an “approved persons” regime administered initially by the Financial Services Authority, and now by the Prudential Regulatory Authority. The PRA determines who is fit and proper to hold key positions in finance. Most of the focus has been on who is approved and how. But prior authorisations can be revoked. One wonders why they haven’t. Surely there is no shortage of scandal-linked wrongdoers. Who would not want them to act? Think about the list of those who have a stake in the matter. Banks serve multiple stakeholders. These include society, clients, shareholders, employees and executives. We have already mentioned society’s outrage and clients’ dismay. Both have been clamouring for justice. What about the others? Surely shareholders should want the unfit to be identified and punished. After all, the depth, breadth and persistence of the wrongdoing shows that either management were complicit in their subordinates’ actions, or they were too incompetent to prevent it. Take your pick, but both are cases for being banned as unfit for such responsibilities. I am sure shareholders would trade an executive or two for a few billion less in regulator fines. Similarly, employees should be seething. Most bank staff are honest and hardworking. They are sick and tired of having to defend the reputation of their industry. And that reputation continues to suffer from the well-founded belief that the “bankers got away with it”. Moreover, the penalties and fines caused by wrongdoers have led to cutbacks in employee bonuses and perks. So, why didn’t the bank chiefs control them, manage them, discipline them and oust them? And then there are the executives themselves. Yes, they are also stakeholders. Indeed, many commentators have argued that banks have long been run by the executives for the executives – and still are. But have the executives not insisted they are a force for good? Have they not vowed to clean up their institutions? Have they not funded a banking standards review commission to boost banking standards? Yes, but it might help their case if they called publicly for the banning from finance of everyone in positions of responsibility connected with the scandals. Why haven’t they? What are they afraid of? Finally, there are the regulators. They are not stakeholders in any one institution, but regulators and policymakers do have a stake in the legitimacy and stability of the system they oversee. Accountability is key to that legitimacy and basic to driving behaviour. Thus, it was encouraging to hear the Bank of England governor, Mark Carney, contemplate the naming and shaming of financial wrongdoers. He could start with the backlog on the books. Six years on from the collapse of Lehman Brothers, many large banks remain too big to fail, too big to bail, too big to jail and too big to manage. Are they also too big to regulate? |