TODAY’S voluminous report from the Banking Commission is a strange beast, as awful in parts as it is excellent in others, a direct product of the incompatible views forced to coexist on the committee that drafted it.
The commission was chaired by the excellent Tory MP Andrew Tyrie, but the wide range of views among its members meant that its conclusions were never going to be either coherent or sensible.
The result is a mish-mash of good and bad analysis; of robust, empirically-grounded comments and sweeping, unsubstantiated, ideological and even inflammatory assertions; and powerful pro-competition and anti-subsidy arguments combined with nonsensical attacks on shareholder rights, freedom of contract and even the right to make a mistake. At times, the reports bemoans extreme individualism in the City – at others, it slams the reliance on group decision making and the inability to pin responsibility on individuals. It doesn’t draw sufficiently on academic evidence and accepts much conventional wisdom.
The commission is rightly pro-competition, and endorses moves towards bank account portability. It bemoans the bias in the tax system towards debt, the lack of transparency, the failure of internal controls, badly designed contracts and the incompetence of regulators. It contains a partially sensible critique of paying people in shares (rather than in a mix of shares and bonds), though exaggerates the scale of the one-way bet issue.
The report rightly criticises implicit guarantees from governments: pre-crisis, in the absence of proper mechanisms to allow banks to fail in an orderly manner, it was rational for bankers to take excessive risks and for consumers not to care where they deposited their cash.
But then it repeatedly claims that large banks still benefit from this subsidy, which is only really true in the sense that the final resolution mechanisms have yet to be agreed (some of its witnesses say we are almost there, others that there is lots of work still needed, especially on cross-border cooperation). While more progress is needed, the reality is that following the bail-ins in Cyprus and now Co-op, it would be absurd for bondholders to believe that they will still be protected.
The report then seemingly contradicts itself. One of its strong points is that it understands the need for controlled failure as a fundamental disciplining mechanism of capitalism – but it then seeks to eliminate failure by making it almost illegal. One of its “big ideas” is that bosses that take risks deemed “reckless” would face jail. But criminalising failure will simply make banks entirely risk-averse, compounding the insufficient supply of credit. Why lend if things eventually go wrong and the policy is subsequently deemed reckless? Why take risks with small firms or the economy? If one wants to destroy the banking industry and turn it into an inefficient, useless bureaucracy, that is the way forward.
Bosses would have to prove that they weren’t reckless, in a reversal of the burden of proof that would breach basic human rights. It would be yet another betrayal of natural justice, something that is increasingly happening in the way regulators and individuals interact in financial services. The quote is extraordinary: “There will be a requirement on relevant Senior Persons to demonstrate that they took all reasonable steps to prevent or mitigate the effects of a specified failing. Those unable to do so would face possible individual enforcement action, switching the burden of proof away from the regulators.”
Another bad idea is that bonuses need to be deferred up to 10 years. That is far too long and would effectively end performance related pay; it would be catastrophic for London. The current three-year deferral model is sensible. All in all, a very mixed bag.
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