I’ve spent more time than most interviewing bankers in the wake of the financial crisis of 2008 and take a fairly robust view of those who ran the mega-banks into the ground. I never like to mention it… but I wrote a book on the subject, about RBS, which is still available this Christmas in paperback.
Some of those involved in the creation of the crisis behaved appallingly. There was incompetence and monumental arrogance. And that was just the politicians. Simultaneously, a large part of the banking elite behaved shamefully, in mistaking a credit bubble and lending-driven bonus bonanza for evidence of their own alleged genius. Too many journalists, like me, did not see disaster coming and many people – retail customers and businesses – borrowed far more than was sensible. An obsession with increasing scale and over-reliance on technology and data-driven models created the illusion of stability and endless prosperity. The blame for the banking crisis is widespread and a degree of public anger is obviously justified.
That does not mean I can join in the outrage over George Osborne’s latest decision, to scrap a law designed – in British red-top terminology – to “crack down on fatcat banking bosses”.
The Mirror reports the anger of the Liberal Democrats, who say that Osborne is just doing his friends in the City a favour by being too soft. This is not how the more sensible and level-headed people in the City see it, as they contend with regulators who have gone from being toothless pre-crisis to intimately involved in every aspect of deals. The new set-up threatens to destroy the notion that a business deal is undertaken in a free society by two parties obliged to obey the law. Instead, everything is now crawled over.
The new provision which has been scrapped was included in UK legislation due to come into force in March. Thank goodness Osborne made the decision. It was not only wholly impractical in governance terms. Much worse than that it threatened to be plainly unjust.
It would have meant that bank chief executives could have been found guilty of misconduct even if the City watchdog had no proof that he or she had not known of the wrongdoing.
Ostensibly, at first glance, in a BBC Question Time satisfy the mob style, this sounds reasonable enough. One can see why people might think: they should know everything that goes on if they’re the boss and if someone does something wrong on their watch, why not string ’em up?
But think about it. That involves the twisting, an inversion, of the idea that the prosecution has to prove guilt. The bank CEO would have to prove that they had made every effort to prevent something they didn’t know about. They would be asked in court to prove a negative, or win a highly subjective argument about what is enough micro-management and what is too little. Imagine how vast the grey area is, and how expensive it would be to police. This when bank bosses run institutions in which they are already accountable to shareholders and obliged to abide by a vast suite of existing laws.
What it would have meant if it had been implemented is ultra-conservatism and an increase in the enormous bureaucracy inside existing banks, as CEO’s ran the company not with shareholders or customers in mind but as a protection – their own protection – racket. The calcifying of the system and the impact on lending, to business and the rest of us, shouldn’t be hard to figure out.
One of the main lessons from the British crisis was about regulatory failure. There was a lot – tons – of regulation before the crisis, but it was of the wrong things. There was considerable focus on the consumer rights agenda, and too little on what was needed to prevent the system collapsing. There needed post-crisis to be a switch to simpler and more effective regulation, focussing on the big ticket items in the banking system: capital, liquidity, systemic risks.
There is much more that could be done that has not been done to introduce competition. After the crisis the UK’s banks might have been broken up, although it is questionable who would buy the old branches and legacy businesses when banking is on the cusp of epic digital disruption. The UK government has done much that is positive to encourage the growth of “fin-tech”. Perhaps more competition will emerge there from in the rise of new financial and banking companies not burdened with the legacy of patched together computer systems from the era of mega-mergers and too rapid growth pre-2008.
What is not needed, and was never needed, is a law so unjust, so difficult to prosecute fairly, that it would end up making reasonable people feel sorry for bank CEOs.