The case for bringing the banking big shots to heel

Anthony Hilton
1 May 2009

People who say the Treasury Select Committee report into the banking crisis tells us little we did not already know rather miss the point. We know as much as we do at least in part because of the Committee's hearings and its cross-examination of many of the people involved, so there was unlikely ever to be much new information in the report published today. That also goes for its conclusions, which have been well-flagged.

We need to remember too, as Committee chairman John McFall said at a conference yesterday, organised by the Global Policy Institute on the future of the City, it is a seriously under-resourced body and its role is not to come up with global solutions to global problems. Rather, it exists to give these matters an airing, to put them on the record and thereby to provide some institutional memory for these events.

The question, however, is whether this is enough, and one of the more intriguing questions to McFall was the suggestion that there should be a Royal Commission, or an equivalent Government-commissioned tribunal, to pick up from where the Treasury inquiries have left off. Its purpose would be to get absolutely to the heart of the causes of the crisis, to take evidence from a much wider circle than the Select Committee could manage and to produce a report that, like the Bank Rate Tribunal of 60 years ago, would get to the core of current financial practice.

One's immediate reaction was to groan at the thought of yet another inquiry, again going over the same old ground. But that perhaps is not the correct response. Rather, it may be that such a tribunal would be the best way to build a consensus on the ideal way forward for financial regulation.

Without such a consensus, we are in danger of getting something that is anywhere between a financial dangerous dogs act and a dog's breakfast, and in neither case remotely fit for purpose. A tribunal might, if it does its job properly, be a “truth and reconciliation commission”, which would take the revenge element out of moves to regulate, and instead aim to produce a system which works.

This may, of course, be naive. Professor William Buiter realistically told the conference that there would more than likely be 10 years of over-regulation before memories had faded enough for more sensible regimes to reassert themselves. Meanwhile, he reminded the audience that while the City had undoubted expertise, it had also been the home of the soft touch, a tax and regulatory haven.

This should be borne in mind when assessing the legitimacy of the current noisy protests from hedge funds, private-equity groups and others against new regulatory proposals. Let the City compete through competitive advantage, not regulatory arbitrage, he said. “Don't lobby for the retention of the tax dodgers.”

The power of the financial lobby also exercised Professor John Kay. It was, he said, the most powerful lobby in the country. It was an industry that had mesmerised New Labour and continued to mesmerise it, he added. How else could you explain the handing over of billion of pounds in bailouts without any serious instructions to the bank boards on how the money should be used, nor any demand for meaningful reform.

The strength of the lobby in some way made British bankers resemble Russian oligarchs in that they had become so rich and powerful in society they could bend politics to their will and use the political process to reinforce their position, he said. While that may sound far-fetched now, it was commonplace in the city a couple of years ago for investment bankers to boast about how the UK Treasury would never propose anything without asking them first and giving them the opportunity to block it.

That nexus needed to be broken, he said, and there would never be a better time to do it than now. Similarly, there would never be a better time to push through meaningful reform of banking. Indeed, he said, if it doesn't happen now when the banking system is relatively dependent on the state, it never will.

In future, banking regulation should exist to protect depositors and the integrity of the payments system on the one hand and also to provide some degree of consumer protection for customers, he said. Everything else should be left to the market. And if people worried still that some banks were too big to fail, there was a simple solution to that problem too. Make them smaller.