Locking up bankers for recklessness may be unworkable in practice

There has been mixed response to the Parliamentary Commission on Banking Standards report, one element of which is the proposed introduction of a new offence - reckless misconduct in the management of a bank.

There are fears that such a rule could discourage risk taking. Omar Ali, UK head of Banking and Capital Markets at Ernst & Young:

As personal risk for directors increases and rewards are increasingly scrutinised, senior bankers will need to decide whether they are willing to take on this level of personal risk. The sector may well lose strong leaders to top roles outside of banking.

We all also need to bear in mind that good decisions can nonetheless have poor outcomes. Building businesses and developing economies involves taking risks and not all of these decisions will have a happy end. Pretending that they should and holding the decision maker criminally responsible if they don't will stifle entrepreneurship and limit growth.

If we're to stop telling bankers to take risks, this may mean that poorer households and smaller businesses who are seen to be less likely to repay loans, may be less able to access credit.

Sam Bowman of the Adam Smith Institute points out that even bankers may not know if they are reckless, as indicated by the personal losses made by executives that result from bad decision making:

During the 2008 crisis, plenty of executives at failing financial institutions made the same mistakes that their firms made. AIG’s former CEO kept much of his net worth in AIG stock, most of which he lost. The CEO of Lehman Bros lost $1bn. Citigroup’s Sanford Weill lost $500m. Between them, Bear Stearns’ executives lost billions.

There are many other examples like these. If bankers had known that they were acting recklessly in business, they would not have done the same thing with their personal holdings. That so many executives' personal losses were so great suggests that they did not realise what they were doing. Their bad business moves were errors, not calculatedly reckless decisions.

(Adam Smith Institute)

The CFA's chief executive Will Goodhart has said that such a law might not even function:

The call for a new criminal law of recklessness misconduct has already attracted headlines but it is hard to see why it would be necessary if the commission’s other recommendations were accepted and a new law may well be unworkable in practice.