Once again, George Osborne has got it wrong on bank reform

 
Allister Heath

IT is obvious that somebody zig-zagging across traffic at 95mph in central London is driving recklessly and endangering lives. It is much harder to determine what being reckless actually entails in business, let alone banking – which is a bit of a problem given the chancellor’s plan to criminalise the phenomenon. Jailing people for something that nobody can define in advance is contrary to natural justice and makes a mockery of the rule of law.

It is vital to continue to reform banking and to make sure the system works better in future. It is also right to jail cheats, liars and fraudsters – and let us hope that people who deliberately manipulated Libor and thus betrayed the confidence of those who used the index will be punished severely. But George Osborne’s latest plan is just another half-baked populist initiative that will merely damage the economy and make banks more likely to relocate their HQs abroad, thus avoiding the new rules. It risks criminalising failure, which would turn banks into extreme risk-avoiders, utilities bent on avoiding any chance of losing money. This would cut off credit to small businesses, property developers and homebuyers without massive deposits. Down that road lies paralysis and stagnation.

Nobody really knows what the new law would ban. Is launching a new bank reckless, given the high chances of failure? Is lending money with a high loan to value ratio, as the government wants, to properties that economists believe to be over-valued, reckless? If so, who is being reckless: the government, the lenders or the borrowers? With the benefit of hindsight, all failed entrepreneurial efforts look like doomed flights of fancy, but at the time they often sound brilliant.

Perhaps recklessness will be about not following the right bureaucratic procedures. Bank CEOs will surround themselves with lawyers, and every decision they will take will be accompanied by hundreds of pages of box-ticking, there to show that the crisis, when it comes, was of the legally sound kind. Consultants will be asked to sign everything off – and they will, guaranteeing that the blame will be spread when the world changes and what everybody thought made sense ceases to do so. Shareholders will be consulted – and they will back stupid decisions, just as they backed RBS’s takeover of ABN Amro. CEOs will pretend to manage by committee, blurring lines of command and reducing individual responsibility.

It seems that sanctions may only kick in if a bank has to be bailed out. But with the new resolution procedures being introduced, bondholders and other creditors will be hit next time a bank is in trouble, eliminating automatic bailouts. This is great – but politicians will still have the right to bail out a bank, and hence their subjective actions would determine whether or not someone’s actions were criminal – which is senseless.

Astonishingly, the government seems to believe that the burden of proof should be reversed, and executives forced to prove their innocence. What do the Liberal Democrats – yes, they still call themselves liberals – think about this? Are they so consumed by anti-banking sentiment that they don’t care any more about traditional English liberties? Everybody in the UK should have the right to the presumption of innocence.

There is a better way to discipline bankers than to invent undefinable new offences – and it’s called capitalism. The government must crack down on real crimes – but otherwise it should focus on reintroducing the fear of failure into creditors’ hearts, and allow the pitiless discipline of profit and loss to do the rest.

Banking lost the plot in the West when governments extended the welfare state to financial institutions. Fear of financial loss ceased to balance out greed, and that was the beginning of the end. It’s time to move on.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath