John Humphrys asks: are new recommendations to bring reckless bankers to book the right ones?
Ask people who they blame for the financial meltdown and subsequent economic slump of the last few years and most would not hesitate. Bankers. Ask them again whether those same bankers have been properly brought to book and, again, there would be little hesitation. No. Now an influential committee of eminent figures has said pretty much the same and they have told us what they think should be done about it. Are their recommendations the right ones?
The Parliamentary Commission on Banking Standards was set up by the government last summer less in response to the alleged responsibility of bankers for the crisis of 2007/08 and more as a result of a later scandal. This was the revelation that leading banks conspired to rig the ‘Libor’ rate, a hugely important rate of interest used as a benchmark for almost all other rates. But the commission chose to look at the problems of banking in much broader terms.
It was chaired by the redoubtable chairman of the House of Commons Treasure Select Committee, Andrew Tyrie, and included, among others, the former Tory chancellor, Lord Lawson, and Justin Welby, the new Archbishop of Canterbury and a man, unusually among bishops, with a professional background in finance.
The theme of their report, called ‘Changing banking for good’, is the need to restore a sense of responsibility to banking. This is hardly surprising since irresponsibility has been the defining hallmark of the reputation of banks in recent years. Bankers have been charged with irresponsibility in at least three distinct ways.
During the boom in the decade or so before 2007 they are accused of aggressive and wholly irresponsible lending practices which include:
- pressing loans on people who simply could not afford them;
- gross irresponsibility in hugely expanding the balance sheets of the banks;
- famously paying themselves enormous salaries and even more enormous bonuses irrespective of whether their activities were in the long-term interest of their banks, let alone of the wider economy.
The banks’ defenders arguer that however excessive their behaviour may have been, they were not the prime culprits responsible for the economic woes of the last few years. Instead, they point the finger both at central banks, for keeping interest rates artificially low and thus flooding the world with money the banks had to find a way to put to use, and at governments for pursuing ‘light touch’ regulation.
But even if the banks were not the sole villains of recent economic history, there is no doubting that their behaviour contributed hugely to the mess we have all found ourselves in. Finding ways to prevent them from doing it all again was the task the commission set itself.
Presenting its report Mr Tyrie said: “This is not a bank bashing report. I hope the higher standards it advocates will help revive the banking sector and the UK generally.” But the report is unequivocal in making clear how much the commission thinks those standards need to be raised. It says that “one of the most dismal features of the banking industry” that emerged from the evidence the commission took was “the striking limitation on the sense of personal responsibility and accountability of the leaders within the industry for the widespread failings and abuses over which they presided.” Mr Tyrie added: “Personal accountability is little more than an illusion in many parts of banking, especially at senior levels.”
Many of the recommendations in the 571-page report focus on making those who work in banking, especially at senior level, take more personal responsibility for what they do. Bank regulators should reform the approval system for the appointment of senior executives, assigning specific responsibilities to named individuals so that the buck cannot endlessly be passed. It wants bank chairmen to work full-time, rather than part-time as is often the case now.
The commission says that the current remuneration system for senior bankers rewards failure and needs radical change. In particular it wants to put an end to sales-based incentives and to change the whole way bonuses are paid. It does not share the view of the European Parliament that bonuses should be capped – many people think such a cap could easily be got round simply by converting excess bonuses into higher salaries. Instead the commission advocates the paying of bonuses in the form of bonds and making them deferrable for up to ten years, with a clawback capacity in the event of banks getting into trouble as a result of irresponsible decision-making by those awarded bonuses.
Perhaps the most eye-catching recommendation is that there should be a new crime of “reckless misconduct in the management of a bank” with prison sentences available as an ultimate sanction.
Although banks are the main focus of the commission attention they are not alone in being rebuked for their behaviour. The government itself is charged with a level of interference in the running of partially nationalised banks such as RBS and Lloyds TSB that is “clearly not acceptable”. When I spoke to the Chancellor George Osborne a few days before the report was published he did not attempt to deny that he had been a party to the resignation of the chief executive of RBS, Stephen Hester.
It will be for the government to decide how much of what the commission recommends should be implemented. It will receive plenty of contrary advice. It will be argued that the recommended regulation of senior bankers is too draconian and will act as a disincentive to able people thinking of going into the industry. It will also be pointed out that if banking is more tightly regulated in Britain than elsewhere, banks here will up sticks and go elsewhere. Given the increasing dependence of the British economy on financial services, such an outcome would be a case of cutting off one’s nose to spite one’s face.
So, given popular anger at the banks for their past behaviour, are the commission’s ideas justified or could they be self-defeating? And you have other thoughts on what should happen to them, what are they?
