BANKERS, regulators, politicians, auditors and shareholders are all under fire from MPs and peers today, accused of failing to understand the banking industry and its risks, in a wide-ranging report into the sector.
According to the Parliamentary Commission on Banking Standards (PCBS) – set up by the government in the wake of the Libor scandal – much of the rulebook should be torn up and rewritten, with even plans made since the financial crisis scrapped and replaced.
The Commission, chaired by Tory MP Andrew Tyrie, says bankers still face incentives to take excessive risks, shareholders do not understand what is happening in the firms, and politicians are at risk of falling under the sway of industry lobbyists.
It wants the government to look into breaking up RBS into a good bank and bad bank, which it hopes will allow the bank to increase lending more rapidly.
That would mean scrapping the current setup, which has seen the bank spend five years running down its bad assets and returning to health.
The proposed bad bank could hold assets of anywhere between £50bn and £1 trillion, the report said, and could take several years to hive off from the good part of the group.
“RBS continues to be weighed down by uncertainty over legacy bad assets and by having the government as its main shareholder,” the report said.
“Such problems for one of the UK’s largest banks weaken confidence and trust in banks and bank lending.”
The chancellor is expected to announce a review of the bank’s structure in his Mansion House speech tonight.
George Osborne has already been taking a more active role in running the bank, pushing it to cut back on overseas operations and investment banking, and focus on UK retail and business loans.
The Treasury’s increasingly heavy handed approach to taxpayer-backed banks also came under fire, as did the organisation responsible for managing the state’s stake in RBS and Lloyds.
“UKFI will increasingly be perceived as a fig leaf to disguise the reality of direct government control,” said the report.
“The commission has concluded that UKFI should be wound-up and its resources absorbed back into the Treasury.”
The commission’s wish list also calls for more accountability for senior bankers’ role in systemic failures, pushing jail sentences for executives that take risks deemed reckless.
Members also want bonuses to be deferred for up to a decade, and the ability to cancel bonus and pension perks if the bank is forced to take taxpayer support.
The government is understood to be keen to introduce more measures to make individuals more accountable, with tougher punishments for rule-breakers and those who bring down banks.
However, City analysts fear the plans to jail risk-takers may misunderstand how banks work.
“We need to bear in mind good decisions can nonetheless have poor outcomes. Building firms and developing economies involves taking risks and not all of these decisions will have a happy end,” said Ernst and Young’s Omar Ali. “Pretending they should and holding the decision maker criminally responsible if they don’t will stifle entrepreneurship and limit growth.”
MPs and peers are also calling for shareholders to have less say in the running of a bank with priority given to an institution’s financial stability, with directors facing more personal accountability for problems, and regulators having more influence over operational decisions.
“Shareholders are ill-equipped to hold bank boards to account,” the report argues.
“In particular, institutional shareholders have incentives to encourage directors to pursue high risk strategies in pursuit of short-term returns and ignore warnings about mis-selling.”
Similarly the PCBS disagrees with moves in the industry to pay bonuses largely in shares to tie staff interests to those of shareholders. The commission, argues such payouts give bankers incentives to boost the share price in the short term for their own financial gains.
The PCBS also called for a tougher limit on bank leverage, setting itself up for a further row with the chancellor, who has so far rejected the plan arguing it will hit lending and particularly hurt building societies.
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Click here for Elizabeth Fournier's bottom line and to see the Banking Commission's report at a glance