By Mark Wallace
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- the new system for banking had to be good, seeing off the possibility of a repeat of the disastrous crash
- the new system had to be seen to be tough, satisfying the demands of the public and the media that bankers should be harshly punished
The difficulty comes if those two objectives are in conflict, rather than in concert. For example, public bloodlust might be satisfied by the sight of Government taking a direct hand in running the major banks – but politicians do not have a good track record for overseeing large organisations and huge budgets.
In the short term, humiliating the former Masters of the Universe would be a win – but one that would swiftly be forgotten in the rush to form a lynch mob if, in the long term, the new system allowed banks to crash once more.
Tyrie is a clever man – equipped not only with the ability to balance those two agendas, but the nous to see the full scale of the problem facing him.
His report, 'Changing banking for good', reflects that intelligence but is not without its problems.
It has two major elements:
1) Tactical Changes
These are the steps which take aim at bankers personally. The law on the legal responsibilities of senior bankers should be changed, the report argues, to hold them personally responsible for reckless behaviour in the areas they oversee – if that behaviour leads to disaster.
To back that up there should be fines and potentially jail sentences for those found guilty of reckless misconduct.
This certainly makes a start at addressing the demands for banker-bashing, but it raises practical questions.
Definition: How will 'reckless misconduct' be defined?
Confusion: As the offence only applies to banks which fail "with substantial costs to the taxpayer, lasting consequences for the financial system, or serious harm to customers", does that mean some bankers could be pursuing practices at a profitable bank which would be criminal to commit at a bank which later gets in trouble? Could courts really jail someone for doing something which other bankers are simultaneously allowed to do as long as their gambles pay off? How are banks to tell the difference between the two at the time?
Unintended consequences: As the Institute of Directors asks, might introducing individual criminal responsibility to a process in which boards are meant to make collective, collegiate decisions risk damaging the good management of banks further simply in order to have someone to punish afterwards? Might these new, personal risks mean the pay required to persuade someone to take such senior roles could become even higher?
2) Strategic Changes
These are the longer-term proposals for restructuring bank regulation and banker accountability.
Bonuses: Deferring portions of bankers' pay and bonuses for a number of years is a sensible hedge against rewards for failure, and will help to address the problem of short-termism. Similarly, Tyrie wisely rejects the EU's proposed bonus cap as unworkable and unjust.
This type of deferral is in essence an attempt to escape the problem of spending other people's money without accountability. As Guido has discussed in the past, investment banks used to spend their partners' money – not shareholders' – which encouraged more caution and less recklessness. Deferring bonuses, like giving rewards in share options which the recipient must hold for a number of years, is a move to restore bankers' long-term interests in the success of their bank.
Competition: Tyrie also addresses what has so far been the elephant in the room during the nation's five-year debate about banks: the lack of competition. New sources of finance, such as peer-to-peer lending, and new banks on the traditional model would apply welcome pressure to the existing institutions – and provide new opportunities for customers to seek a better deal or a more reliable place to put their money. The report has less detail on this area than it might, but kicks off a long-overdue discussion on how to open up the financial sector.
Shareholders: Finally, there is the question of bank shareholders, a group who have escaped the crisis with remarkably little criticism. Yes, many of them lost their money, but while politicians and bad bankers have understandably been put in the stocks, few have asked why shareholders did so little to scrutinise the management of the banks they owned.
Tyrie acknowledges the limited powers such shareholders currently have, but rightly points out that the rise of institutional investors contributed to the problem, too. Far too often those managing investment portfolios or pension funds failed to engage at all with the banks they had bought shares in.
Surprisingly, the report dismisses the value of greater empowerment of shareholders, despite the impact of last year's "Shareholder Spring". Perhaps this is a missed opportunity to improve owner oversight of the banks and beef up the rights of those whose pensions or savings are being handled by lazy asset managers – should they not have the right to hold such people accountable for failure, too?