Banking StandardsWritten evidence from Sir Don Cruickshank


Take heed of David Walker’s evidence that standards are no worse than they have been at times in the past: consider the possibility that the decline in standards in financial services over the past decade has been but calibrated to standards elsewhere in public life: and before you start drafting, read Trollope’s “The Way We Live Now”.

Causes of Imperative for Governments to act to Save Banking System

Basel 2 let the banks regulate themselves, especially as regards capital requirements. How else could an average post war gearing of c20 have become c50 in just six years from 2000? This was exacerbated in the UK by weak regulation in the form of the FSMA 2000 and by very poor application of competition law.

Central bank monetary policies caused a glut of money that the banking system had to process and encouraged too many people to insert their fingers into the passing flow for private gain

Boards failed to root out poorly structured incentivisation policies throughout the banks—not just at senior levels

Certain aspects of transparency are bad not good. Examples are: quarterly reporting, reserves policy, accounting standards (especially the move to US style rules based international standards), publishing minutes of authorities’ deliberations

Over-riding principle

The banking system is de facto part of the state and, therefore, regulation of, and competition policy with respect to, the state’s agents—those licensed to provide financial services—should be exceptional and harsher than that applied to the rest of the economy. The Regulatory Contract between the state and banks needs to be toughened in favour of the state and the economy at large. In particular, the state has a legitimate interest in improving the management and behaviour of bank management.

What to do, within a new Regulatory Contract of exceptional regulation and competition policy:

Legislate for a Financial Corrupt Practices Act applying to anyone licensed to provide financial services (cf Foreign Corrupt Practices Act of the US, policed by the SEC and DoJ).

Legislate to provide that directors sitting on Audit/Risk/Governance committees of financial institutions are held to higher standards —civil and criminal— but in return, make compliance officers/internal audit/risk managers directly accountable to these committees and create the expectation that these committees will often and systematically seek independent advice.

Take all regulatory functions away from the regulated. The LIBOR scandal is just the tip of the iceberg here.

Ensure that Vickers is not diluted further by HMT officials.

Charge somebody with competition powers to implement—not just investigate and report—personal and SME account portability. Without this change, competition in retail markets will not flourish however many “new” banks come on the scene; free-in- credit (the root source of poor treatment of customers because of hidden and behaviour distorting cross-subsidies) will be sustained; and customers will never be better served.

What not to do

Do not let Basel 3 and EU policy initiatives overreact to events of the past few years (see perspective above).

Do not do anything that would weaken the UK’s competitive position in world financial markets.

Do not implement the huge concentration of power in the BoE that is inherent in the government’s proposals for banking reform. Therein lie the roots of future crises and ineffective regulation.

Do not call for or, worse, attempt to legislate for shareholders to bear the government’s supervisory role of the governance of financial institutions. Shareholders should buy or sell as they think fit.

18 October 2012

Prepared 19th June 2013