The extra capital requirements proposed by the Financial Stability Board reflect the global effort to make banks safer post 2008. But to really change the way banks deal with risk, we need a culture where risk management is prioritised and adequately resourced in all financial institutions. The FSA’s enforcement agenda increasingly focuses on governance and risk management. The fine levied against UBS for the defective controls that failed to spot Kweku Adoboli’s off book trades follows similar action taken against the bank in 2009 and Société Générale in 2008. By setting UBS’s fine at 15 per cent of the revenue of the relevant trading division, the FSA is sending the message that it expects high standards in these areas. The FSA also tries to hold senior individuals to account for any failings. In our view, FSA action of this nature will be more effective than increased capital requirements in changing banks’ attitude to risk management.
David McCluskey is a partner at Peters and Peters.
Post 2008, we have had two trends in City regulation. The first is increased reserve requirements in various different ways – oddly ministers persist in trying to persuade banks to lend more while at the same time increasing the restrictions that stop them lending more. The second is constraints on pay in the direction of making the pay more dependent on long term results. The only real way of making banks careful about risk is not by getting civil servants to second guess them but by making the boards take personal responsibility – if necessary reinforced with fairly draconian sanctions. If boards take personal responsibility, then dangerous lending will be curbed. And pay will move into line with the objectives of the shareholders. Put the responsibility where it belongs – on the banks’ boards.
Professor Douglas McWilliams is chief executive of the Centre for Economics and Business Research.