Vengeance won’t bring com­pli­ance to bank­ing

The Star Early Edition - - OPINION & ANALYSIS - Mark Gil­bert

REG­U­LA­TORS around the world are mak­ing good progress to­wards pre­vent­ing fu­ture bank crises from hurt­ing the global econ­omy. Some of the new rules pro­posed for in­di­vid­ual bankers, how­ever, have more to do with re­venge than safety.

Un­less the aim is to make life so dif­fi­cult for the world of fi­nance that the banks are forced to shrink – and, granted, that may be a de­sir­able out­come – the pro­pos­als risk do­ing more harm than good.

The urge to con­tinue bash­ing bankers is un­der­stand­able, if in­ap­pro­pri­ate. Last week’s con­fir­ma­tion that for­eign ex­change traders con­spired to rig cur­ren­cies even as their banks were be­ing fined for ma­nip­u­lat­ing Li­bor (London in­ter­bank of­fered rate) is clear ev­i­dence the fi­nance in­dus­try hasn’t learnt enough from the credit cri­sis. Vengeance, though, won’t help.

This week, the par­lia­men­tary com­mis­sion on bank­ing stan­dards, which has been at the fore­front of the UK’s re­fur­bish­ment ef­forts, is­sued a progress re­port on its June 2013 rec­om­men­da­tions.

One of its con­clu­sions makes sense: Bonus pay­ments should au­to­mat­i­cally end for the ex­ec­u­tives of any bank that needs a tax­payer bailout. All the work be­ing done to make sure banks main­tain ad­e­quate cap­i­tal to avoid that out­come makes this bonus rule es­pe­cially im­por­tant. But the re­port also says that reg­u­la­tions need to be changed to cap­ture both the in­di­vid­u­als who sub­mit­ted false money-mar­ket rates in the Li­bor scan­dal and the traders who schemed to dis­tort cur­rency val­ues.

Ac­cord­ing to com­mit­tee chair­man An­drew Tyrie, reg­u­la­tion needs to fo­cus on those who can do se­ri­ous harm to a firm, its cus­tomers or mar­kets.

The appalling mis­con­duct in the for­eign ex­change mar­ket re­vealed last week il­lus­trates the im­por­tance of this. Traders in­volved in that mis­con­duct must be in­cluded in the new cer­ti­fi­ca­tion regime.

This regime puts the onus on banks to iden­tify the peo­ple re­spon­si­ble for each risk-tak­ing func­tion. But it won’t work to try to ex­tend ac­count­abil­ity all the way down the food chain.

To see why it won’t, con­sider how in 1995, Nick Leeson bankrupted the ven­er­a­ble Bri­tish in­sti­tu­tion Bar­ings after los­ing more than $1 bil­lion (R11bn).

Leeson’s trades were sup­posed to in­volve min­i­mal risk, ex­ploit­ing the teeny tiny price dif­fer­ences among eq­uity fu­tures con­tracts traded on dif­fer­ent ex­changes in Asia from his Sin­ga­pore of­fice.

Even the most ar­dent reg­u­la­tor would have been hard-pressed to clas­sify Leeson as pos­ing a sys­temic threat to Bar­ings prior to his blow-up.

While it seems fair that any and all bank em­ploy­ees should be sub­ject to rules de­signed to claw back bonus pay­ments that turn out to have been un­jus­ti­fied, it’s still im­pos­si­ble to know in ad­vance which new pocket of fi­nan­cial en­gi­neer­ing might turn out to cause trou­ble.

Ty­ing the hands of in­di­vid­ual traders, be­fore it’s clear that their trades are un­duly risky, just keeps them from do­ing their jobs.

If almost ev­ery­one within a fi­nan­cial in­sti­tu­tion is deemed re­spon­si­ble for risk-tak­ing, then no one re­ally car­ries the can. Des­ig­nated su­per­vi­sors should be held ac­count­able for the de­part­ments they head, with the prom­ise of sanc­tions up to and in­clud­ing crim­i­nal li­a­bil­ity for bad things that might hap­pen on their watch. – Bloomberg

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