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Proposed jail time unlikely in final banking code
By Howard Davies |
June 25, 2013, Tuesday
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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 - one with London in its name to boot - 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.
Consequences
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.
If the United Kingdom does proceed in this unilateral way, 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.
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.
Challenges
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 UK as a financial center from demonstrating that it can establish and adhere to standards significantly above the international minimum.
Rating agencies and shareholders are nervous when they hear that a stricter regulatory environment is not necessarily a disadvantage.
But a regime in which personal responsibility strongly affects individuals in one jurisdiction will give bankers pause for thought, especially in the case of global banks with complex matrix-management systems that enable product heads to be moved elsewhere.
British legislators will need to be satisfied that any new regime captures the right people, in the right way. However politically appealing the idea of rogue bankers behind bars might be, putting them there is likely to remain very challenging in practice.
Howard Davies is a professor at Sciences Po in Paris. Copyright: Project Syndicate, 2013.www.project-syndicate.org
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.
Consequences
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.
If the United Kingdom does proceed in this unilateral way, 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.
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.
Challenges
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 UK as a financial center from demonstrating that it can establish and adhere to standards significantly above the international minimum.
Rating agencies and shareholders are nervous when they hear that a stricter regulatory environment is not necessarily a disadvantage.
But a regime in which personal responsibility strongly affects individuals in one jurisdiction will give bankers pause for thought, especially in the case of global banks with complex matrix-management systems that enable product heads to be moved elsewhere.
British legislators will need to be satisfied that any new regime captures the right people, in the right way. However politically appealing the idea of rogue bankers behind bars might be, putting them there is likely to remain very challenging in practice.
Howard Davies is a professor at Sciences Po in Paris. Copyright: Project Syndicate, 2013.www.project-syndicate.org
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