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By IFR Editor-at-large Keith Mullin
June 20 (IFR) - The last line of my column last week aboutStephen Hester's firing (Stephen Hester: Have I got a job foryou!) ended up being rather prophetic and a perfect segway intolast night's speech by UK finance minister George Osborne andhis comments about RBS.
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I'd said: "people discount a break-up of the group but I'mnot so sure " And lo and behold Osborne outlines planspotentially to split RBS into a good bank whose privatisationcan be accelerated and a bad bank.
In fairness, I was thinking more along the lines of theMarkets & International Banking division being spun off asopposed to the government firmly embedding RBS's dud andnon-core assets into the UK's balance sheet. But while the badbank will house the commercial property portfolio and its UlsterBank retail unit, it could also include some of the markets aswell as some of the under-performing international bankingbusinesses.
My own view is that the bank is too far down the road forthe split to make sense. Hester - who opposes a split hence hisousting - has been diligently running down the balance sheet forfive years through the sale of businesses, asset sales, run-offsand work-outs and the bank is close to hitting itsloan-to-deposit, RWA and balance sheet targets. For it to havemade sense, the split should have happened at the time of thebailout. It's not at all clear how doing it now will leave UKtaxpayers better off, which is one point in all of this. Or howit will increase the group's lending to domestic SMEs, which isanother.
Of course, Osborne's speech followed publication of theParliamentary Commission on Banking Standards report 'Changingbanking for good' and it would appear he agrees with many of itsdaft conclusions.
I thought the report was short-sighted, hopelessly naïve inparts, arrogant in tone and inward-looking; an overstated pieceof negatively-intentioned twaddle that serves only to big up theegos of the self-important commission members and their grubbypopulist tendencies. I do wonder what planet some of thosebehind the report live on.
If all the recommendations are implemented as is, it willdestroy London as a global financial centre and investmentbanking in the UK as the talent pool either heads out of thecountry or into the shadow banking sector along with all theinnovation and originality that has enabled London to maintainits global pre-eminence for so long.
NO-ONE SPARED
The report spares no-one. It has a pop at bankers inparticular, defining them in effect as a quasi-criminal class.But it also has a go at regulators, the government,shareholders, institutional investors, rating agencies, UKFI(which it wants shut down), auditors, accountants and corporates(for raising too much debt). Actually I can't think of anyoneelse it could possibly have slagged off.
To be clear, banking needed reforming. The over-exuberantexcesses of the period leading up to the global financial crisiswere well .. over-exuberant. And the Libor fixing and themis-selling scandals involving payment protection insurance andinterest-rate swaps were scandalous.
Compensation metrics in investment banking did encouragerisk-taking and short-termism as the end-game was always thequest to generate outsize returns today; never mind abouttomorrow. I've always said that banks should be allowed to fail.The report says so, too. That's one of the few things we agreeon. I think the efforts to reform the industry have progressed,though - painfully at times to be sure - and I am extremelysceptical that the report recommendations will do much tofurther its rehabilitation.
Just picture the scene: you're the head of global markets.It's year-end 2014 and it's bonus time. In comes the head oftrading, who's been diligently handling customer flow all yearand he's made a decent turn for the bank: "Great job this year,"says the boss. "You've made a material difference to ourbusiness. We've increased market share and the future looksgreat.
"You'll recall that under CRD IV you're classified as amaterial risk-taker so your bonus is capped at 1:1, but welldone anyway. Oh, I almost forgot; now that the 'changing bankingfor good' report recommendations have been written into law,you'll get your bonus in 2024 in the form of bail-in bonds. "And may I also remind you that under the new licensing regimeunderpinned by Banking Standards Rules, under which you'reliable to do serious harm, you're subject to the full range ofenforcement powers and if you're found guilty of 'recklessmisconduct' (as-yet undefined), you'll end up in the slammer.Close the door on your way out please."
LEVEL PLAYING FIELD? WHO CARES?
The report ignores the interplay of cross-border regulatorycollaboration and dismisses the very notion of the utility of aninternational level playing field in favour of a home-grownsolution that sets out to be far more robust and stringent thanthe international norms.
This, they reckon, is a lot better than what they call thebox-ticking approach to regulation in the EU and that ratherthan sending banks and bankers away from London screaming bluemurder it will have the opposite effect of making London a moreattractive place in which to do business because of that veryrobustness. Alas, that ain't how it works. Regulatory arbitragewill kill London. And by the way, the report says the threat ofa mass-exodus of talent shouldn't deter the government fromsticking to its guns.
Why on earth would you stick around with so much regulatoryand now potentially criminal baggage weighing you down? Evenless if, under the new Senior Persons Regime, you're held liableand personally accountable for a set of defined responsibilitieseven if those responsibilities are delegated or subject tocollective decision-making.
Under the new regime, individuals will be personally exposedto the full range of civil sanctions including fines and anindustry ban. And if your bank fails, the burden ofresponsibility will fall on you as an individual to prove youtook "all reasonable steps to prevent or mitigate the effects ofa specified failing" rather than on the enforcement apparatus toprove you were negligent or broke some rule.
And, again, if it was found you acted recklessly, you can goto prison and have your comp for that period recovered throughcivil proceedings. The only thing that reckless in this entiresaga is the report and the retribution-seeking ParliamentaryCommission that wrote it. I say tear it up now and bring somesense back into proceedings.
