Can Britain?s Banks Thrive Under Regulation?

The Canary Wharf headquarters of Barclays Bank,which was fined about $450 million for manipulating the Libor inter-bank lending rate.

Photo by Oli Scarff/Getty Images

Last year?s Libor scandal was a shock to the body politic in London. Despite all that had gone before, the public and their representatives were stunned to learn that bankers had systematically undermined the foundations of a global market benchmark ?for personal gain. Britain?s chancellor of the exchequer, George Osborne, felt compelled to launch a parliamentary inquiry. On June 19, after a year?s work, the Parliamentary Commission on Banking Standards finally laid a large egg.

Bankers will certainly regard the outcome as what in England we like to call a ?curate?s egg? (served a rotten egg by his bishop, a young clergyman, when asked whether the egg was to his liking, replied that it was ?good in parts?). They will choke on the commission?s recommendation of a new criminal offense for reckless conduct that leads to taxpayer bailouts, reinforced by a new ?senior persons? regime that would ascribe all bank functions to a specific individual, who would be held personally liable when things go wrong.

The commission argues that ?top bankers dodged accountability for failings on their watch by claiming ignorance or hiding behind collective decision-making.? Its members aim to make that impossible. If they have their way, behaving recklessly with banking assets will result in a prison sentence, with no Monopoly-style ?get out of jail free? card for financial masters of the universe.

I can already hear the sound of lawyers sharpening their pencils: The offense must be defined specifically enough to withstand a human-rights challenge. But, if implemented, the commission?s proposed regime would certainly be tougher than what is now on offer in New York or other banking centers. And British MPs are noticeably impatient with what they consider the glacial pace of change in global regulation; they want action now.

If the United Kingdom does proceed in this unilateral way, what would the consequences be for London?s banking industry? Would New York, Frankfurt, or even Paris receive a competitive boost as international bankers, alarmed at the prospect of time behind bars if their derivative trades blow up again, flee the City?

The commission?s members offer two, somewhat contradictory, answers to that question. The first is that, frankly, they don?t care. ?The risk of an exodus should be disregarded,? the commission says, noting that the advantages of being a global financial center have been accompanied by serious associated risks to the domestic economy. Unlike the United States, where the financial sector is smaller as a share of GDP, the U.K. economy has still not recovered the output lost in the post-2008 Great Recession, owing to continued retrenchment in the banking sector.

The commission?s members do recognize that London?s loss of status as a global financial center would be costly in terms of jobs and output, so they developed a second line of argument. ?There is nothing inherently optimal,? they say, about a level playing field in international finance. Attempts to develop a single European financial market have, in their view, forced countries to respond to the failings revealed by the 2008 crisis at the speed of the ?slowest ship in the convoy.?

By contrast, the commission argues, ?there may be big benefits to the U.K. as a financial center from demonstrating that it can establish and adhere to standards significantly above the international minimum.? In addition to the tough new regime of personal accountability, the commission would supplement the Basel standards on bank capital with a tight leverage ratio.

The British government, preoccupied with finding ways to stimulate growth as the next election approaches, will no doubt think hard before making any changes that might drive business offshore. But the government is caught between a rock and a hard place, hemmed in by a parliament that, strongly backed by a bank-hostile press and public opinion, is eager to enact reforms, and by EU directives to implement a tougher regime.

So, is the commission right that the government should move quickly on reform and disregard the consequences?

Source: http://www.slate.com/articles/business/project_syndicate/2013/06/britain_s_parliament_is_cracking_down_after_libor_it_s_betting_the_banks.html

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