Those who compare the financial sector to the gambling industry show little understanding of either. Whereas casinos, bookies and the like carefully manage their level of exposure to potential loss, the banks have opened themselves right up to the most extreme of downside risks – the so-called ‘black swan’ events popularised by Nassim Nicholas Taleb.
But that’s not the only difference, as John Kay explains in another insightful piece for the Financial Times (also available here on his own website). Banks, like casinos, aren’t just exposed to the risks attached to external events, but also to the dangers of internal malpractice – as Bob Diamond found to his cost:
- "In his letter to Barclays staff the day before his resignation, Bob Diamond used the naval phrase "on my watch" in finally accepting responsibility for traders’ behaviour during his tenure. Mr Diamond had struggled with the meaning of the phrase but eventually grasped, or was told, what it meant: that the corollary of unquestioned authority is unquestioned responsibility."
John Kay’s point is that in the gambling industry, unlike the banks, the top brass know that they will be held responsible for the misdeeds of their staff:
- After all, what would happen if employees of a London casino were found colluding to rig games for the benefit of the house, and particularly themselves? The police would arrive in force, the company would lose its operating licence and senior management would be excluded from the industry."
Kay provides a brief history of casino regulation in the UK, observing that it was ultimately to the benefit of the industry:
- "These crackdowns provoked predictable warnings of regulatory overkill: no one would invest in the industry again; London’s tourism sector would be destroyed. Neither of these fears had substance. Las Vegas and Macau may be the glitziest gaming resorts, but the destination of serious gamblers today is London, where margins are slim but profits high and tables famously honest."
In other words, in a British casino you gamble on the turn of a card, not on the honesty of the croupier – proof that the right kind of regulation can smooth the way rather than getting in the way.
Of course, the wrong kind of regulation has the opposite effect. Instead of establishing minimum standards and clear lines of responsibility, it concerns itself with process not outcome, red-tape not responsibility. Good managers are burdened with paperwork, while bad managers are furnished with a range of convenient excuses: ‘we complied with standard procedure’, ‘we ticked all the boxes’, etc.
Instead of elaborating ever more complicated sets of rules, the way forward is surely to make those in charge straightforwardly liable for what they are in charge of. Noting Bob Diamond’s reference to what happened "on my watch", John Kay concludes that banks, like casinos, should be run like the Royal Navy:
- "…on a principle of strict liability in which the captain is accountable for everything on his ship, whether he knew about it or not, and therefore tries to know as much as possible."
Aye aye, to that!