Macroscope | Regulate the right things, and appreciate ageing bankers

“Organ transplant units are reporting strong demand for the hearts of bankers – because they’ve never been used!” Banker bashing is all the rage; they are more hated than lawyers and tax collectors. The total fines levied by regulatory authorities on global banks now exceeds a staggering US$200 billion, equating to the size of New Zealand’s economy, with most of it levied in the United States. It is a game where regulators swell their coffers by making allegations and agreeing with bank management that the problem will go away by paying up to avoid a messy legal case.

Naturally almost all of the people who were ultimately responsible for those infringements have retired to count their money. A few insist on staying in office to solve the problems the bank would not have had without them. Rarely do the regulators pursue the staff (at least senior staff). Meanwhile, we bank customers and shareholders pay for misdemeanours that happened on their watch.

Regulation of banks has soared since 2008, with compliance departments now pouncing on the slightest irregularity. Banks are no longer run by people who borrow, lend, make payments and trade, but by non-bank professionals who set internal, restrictive and often conflicting rules.

Processes are determined to deal with theoretical lessons learned from fighting the last crisis, not to deal with future practical problems. As a result, banks are suffocatingly over regulated, which squeezes creativity, limits initiative and often increases systemic risk by regulating the wrong things.

At the same time, banks are worryingly under regulated in the likely causes of the next crash – computer trading, stock market management, and derivatives – all a form of excess debt. Bank managers need to have skin in the game – whose wealth (or poverty) is determined by their success; and who understand markets. The inexperienced salarymen who run the vast middle ranks of the industry today bear little personal risk or accountability for their decisions.

A famous eighties joke in Hong Kong spoke of a local bank that put the “W” into banking. The reason that we hate bankers so much – and I am one – is that governments have to bail them out if they take irresponsible risk and the sector collapses. The sector has the most impact on the personal wealth of the man in the street. Banking is one place where you cannot have authority without accountability.