Wednesday, September 14, 2011

don't hold your breath

It is very revealing that it required an expensive and long awaited report from the Independent Commission on Banking (ICB) to point out that banks were failing to carry out the basic elements of what is a fairly simple job, banking. You don’t have to read far into the 360 page document (in which the word failure is mentioned over 90 times) to find it plainly spelt out that banks were incompetent at measuring the risks they took and provided incentives to their employees to take excessive risks with money deposited into their safe-keeping by their customers.

The bankers who are paid in hundreds of thousands, and often millions, of pounds per annum, with the addition of ludicrous, obscene bonuses, proved themselves to be hopelessly incapable of providing sufficient capital to support the risks they took with our money and our economy, and failed to structure their business to cope with losses that anybody with moderate financial skills and common sense could see would inevitably result. Successive governments were too cosy with the banks to try and prevent the disasters that they caused and, needless to say, put the burden of bail-out on to the taxpayer, just to compound our suffering. The ordinary household continues to suffer now as a result of the bankers’ ineptitude whilst their high salaries and bonuses continue unabated. It’s a funny old game.

Has the ICB report come up with radical and clever solutions to prevent and offset future offending by the banks. Not really. Same old same old. Ring-fence the retail operations (domestic deposits and loans) from the ‘investment’ banking (gambling on money markets, equities and funds), and beef up the capital base to afford a bigger cushion against bad-judgement lending. We’ve been there before, and surely the banks should have been capable of reaching these obvious conclusions without the need for the ICB to lay it on the line.

The causes of the banking crisis weren’t really the lack of separation of operations or the thinness of the capital base. They just exacerbated the outcomes. The causes were greed, arrogance, stupidity and egos to match the size of their bonuses. Structural ring-fencing would have played only a small part in containing them. You can warn a child not to risk all his pocket money playing poker but the problems come when he is stupid enough and cocky enough to believe he will always win. The banks became too big and too arrogant and that is a danger whatever the business but more so in banking.

Hopefully the bankers will learn some humility from the critical tone of the ICB’s report but don’t hold your breath. And don’t expect a rapid change as the banks have been given seven years to implement the proposals. Yes, seven years. And don’t expect much change at all anyway. Loopholes will be found and cracks in the ring-fence will be exploited. Bonuses for messing up a straightforward job will remain colossal. Meanwhile banks provide virtually nothing to depositors with tiny interest rates on savings and they refuse loans to good businesses needing funds to grow. They will continue to hold a privileged position because of their necessity to provide the fluidity in an economy.

The rules of banking may change but the culture and ethos may well not.



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