2 Why the PCBS was necessary
Creation of the PCBS
6. The PCBS was created in the wake of the exposure
of the manipulation for private advantage of the London Interbank
Offered Rate (LIBOR) in late June 2012. The reputation of the
banking industry had already been damaged by a string of mis-selling
scandals and the need for UK taxpayers to bail out major institutions.
The LIBOR scandal, however, made the industry appear not just
incompetent, but, in the words of the PCBS, "morally bankrupt".[8]
There was a general acceptance that standards in the banking industry
were low, that a wide-ranging examination of them was needed,
and that far-reaching reform would have to follow. Parliament's
response was to create the PCBS.
The problems of the banking industry
7. The PCBS recognised the crucial role that banks
play in the economy, but concluded that the malaise in the banking
industry was both deep-seated and the result of a combination
of separate causes:
· Bankers, regulators and politicians had
failed to learn the lessons of past failures born of hubristic
expansion and unsustainable asset price bubbles;
· The implicit taxpayer guarantee that made
banks too important to fail and too complex to resolve, and which,
among other harmful effects, gave them incentives to take excessive
risks;
· Banks had become too big and too complex
to be managed effectively. This made it more likely that a bank's
standards would be low, but also gave banks' leaders a convenient
excuse of ignorance when scandals were discovered. Complexity
therefore undermined the personal responsibility of senior executives;
· Senior bankers continued to be paid more
than could be justified by their performance, and incentives were
preoccupied with short term leveraged growth with inadequate consideration
of long term risk;
· Banking culture often lacked a sense of
duty to the customer or of collective responsibility for the reputation
of the industry;
· Banks' internal compliance systems were
ineffective;
· Regulation of the banking industry was
misconceived and poorly targeted, and too narrowly rule-based
rather than judgement-based;
· Retail banking, owing to high market concentration
and substantial barriers to entry, lacked competitive pressures.
This, combined with the information disparity between banks and
consumers, meant that banks had weak incentives to reduce prices
and improve customer service;
· Institutional shareholders had incentives
to encourage banks to pursue high risk strategies in pursuit of
short-term returns; and
· Distorted incentives in banking gave large
rewards for short-term success, incentivising risk on the balance
sheet.
The PCBS's conclusions and recommendations
8. The PCBS concluded that the reforms to bank regulation
already in train would be inadequate to eliminate fully the taxpayer
guarantee. They would also fail to remedy the underlying causes
of poor standards and culture.
9. The PCBS's recommendations had five major themes:
· Reinforcing the ring-fencing changes to
banks originally set out in the report of the Independent Commission
on Banking led by Sir John Vickers;
· Making a reality of individual responsibility,
particularly at senior levels;
· Improving competition;
· Creating much more robust and effective
corporate governance structures, and
· Giving regulators the powers they needed
while holding them to their task.
8 Parliamentary Commission on Banking Standards, First
Report of Session 2013-14, Changing banking for good, HL
Paper 27-II/HC 175-II, para 2 Back
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