June 20, 2013 / 10:43 AM / 6 years ago

COMMENT: Changing banking for good? Not from where I sit

By IFR Editor-at-large Keith Mullin

June 20 (IFR) - The last line of my column last week about Stephen Hester’s firing (Stephen Hester: Have I got a job for you!) ended up being rather prophetic and a perfect segway into last night’s speech by UK finance minister George Osborne and his comments about RBS.


I’d said: “people discount a break-up of the group but I’m not so sure ” And lo and behold Osborne outlines plans potentially to split RBS into a good bank whose privatisation can be accelerated and a bad bank.

In fairness, I was thinking more along the lines of the Markets & International Banking division being spun off as opposed to the government firmly embedding RBS’s dud and non-core assets into the UK’s balance sheet. But while the bad bank will house the commercial property portfolio and its Ulster Bank retail unit, it could also include some of the markets as well as some of the under-performing international banking businesses.

My own view is that the bank is too far down the road for the split to make sense. Hester - who opposes a split hence his ousting - has been diligently running down the balance sheet for five years through the sale of businesses, asset sales, run-offs and work-outs and the bank is close to hitting its loan-to-deposit, RWA and balance sheet targets. For it to have made sense, the split should have happened at the time of the bailout. It’s not at all clear how doing it now will leave UK taxpayers better off, which is one point in all of this. Or how it will increase the group’s lending to domestic SMEs, which is another.

Of course, Osborne’s speech followed publication of the Parliamentary Commission on Banking Standards report ‘Changing banking for good’ and it would appear he agrees with many of its daft conclusions.

I thought the report was short-sighted, hopelessly naïve in parts, arrogant in tone and inward-looking; an overstated piece of negatively-intentioned twaddle that serves only to big up the egos of the self-important commission members and their grubby populist tendencies. I do wonder what planet some of those behind the report live on.

If all the recommendations are implemented as is, it will destroy London as a global financial centre and investment banking in the UK as the talent pool either heads out of the country or into the shadow banking sector along with all the innovation and originality that has enabled London to maintain its global pre-eminence for so long.


The report spares no-one. It has a pop at bankers in particular, defining them in effect as a quasi-criminal class. But it also has a go at regulators, the government, shareholders, institutional investors, rating agencies, UKFI (which it wants shut down), auditors, accountants and corporates (for raising too much debt). Actually I can’t think of anyone else it could possibly have slagged off.

To be clear, banking needed reforming. The over-exuberant excesses of the period leading up to the global financial crisis were  well .. over-exuberant. And the Libor fixing and the mis-selling scandals involving payment protection insurance and interest-rate swaps were  scandalous.

Compensation metrics in investment banking did encourage risk-taking and short-termism as the end-game was always the quest to generate outsize returns today; never mind about tomorrow. I’ve always said that banks should be allowed to fail. The report says so, too. That’s one of the few things we agree on. I think the efforts to reform the industry have progressed, though - painfully at times to be sure - and I am extremely sceptical that the report recommendations will do much to further its rehabilitation.

Just picture the scene: you’re the head of global markets. It’s year-end 2014 and it’s bonus time. In comes the head of trading, who’s been diligently handling customer flow all year and he’s made a decent turn for the bank: “Great job this year,” says the boss. “You’ve made a material difference to our business. We’ve increased market share and the future looks great.

“You’ll recall that under CRD IV you’re classified as a material risk-taker so your bonus is capped at 1:1, but well done anyway. Oh, I almost forgot; now that the ‘changing banking for good’ report recommendations have been written into law, you’ll get your bonus in 2024 in the form of bail-in bonds. “And may I also remind you that under the new licensing regime underpinned by Banking Standards Rules, under which you’re liable to do serious harm, you’re subject to the full range of enforcement powers and if you’re found guilty of ‘reckless misconduct’ (as-yet undefined), you’ll end up in the slammer. Close the door on your way out please.”


The report ignores the interplay of cross-border regulatory collaboration and dismisses the very notion of the utility of an international level playing field in favour of a home-grown solution that sets out to be far more robust and stringent than the international norms.

This, they reckon, is a lot better than what they call the box-ticking approach to regulation in the EU and that rather than sending banks and bankers away from London screaming blue murder it will have the opposite effect of making London a more attractive place in which to do business because of that very robustness. Alas, that ain’t how it works. Regulatory arbitrage will kill London. And by the way, the report says the threat of a mass-exodus of talent shouldn’t deter the government from sticking to its guns.

Why on earth would you stick around with so much regulatory and now potentially criminal baggage weighing you down? Even less if, under the new Senior Persons Regime, you’re held liable and personally accountable for a set of defined responsibilities even if those responsibilities are delegated or subject to collective decision-making.

Under the new regime, individuals will be personally exposed to the full range of civil sanctions including fines and an industry ban. And if your bank fails, the burden of responsibility will fall on you as an individual to prove you took “all reasonable steps to prevent or mitigate the effects of a specified failing” rather than on the enforcement apparatus to prove you were negligent or broke some rule.

And, again, if it was found you acted recklessly, you can go to prison and have your comp for that period recovered through civil proceedings. The only thing that reckless in this entire saga is the report and the retribution-seeking Parliamentary Commission that wrote it. I say tear it up now and bring some sense back into proceedings.

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