Regulate the right things, and appreciate ageing bankers
Banks worryingly under regulated in likely causes of next crash
“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.
Despite the lengthy history of the industry, banking is still very immature. Bankers themselves are very young because the industry has forced, encouraged or demanded early retirement. There is no way that a thirty-something manager of big trading desk is going to hire someone with more experience. In banking, experience is arguably more important than in any other industry, yet young traders can take serious risks with about seven years’ experience – enough time to learn about return, but not about risk. It is no wonder that booms and busts come in seven-year itches!
The problem with experience in the medical industry is different. Research by US doctor and behavioural scientist, Atul Gawnade, suggested that doctors work in cells, learning within but not sharing the hard-earned experience. They are rarely challenged, especially if they are old and have lots of experience – and even if they are past it. So the medical profession has started to take note from the airline industry on how to share experience.
It takes say seven years to train an undergraduate into a junior banker; it takes a doctor 10. Airline captains generally do not receive a command until they have been training for 12 to 15 years. We welcome the capture of both institutional and individual experience because the dangers of flying are so obvious. The industry extensively investigates accidents, reports incidents, plans maintenance and corrects faults as well as disciplines incompetence. There is a strict no-blame culture in reporting lessons learned. No one can accuse the airlines of not being commercial or of not being heavily regulated. We welcome it because we like our pilots old and not bold.
Banking too needs to capture experience rather than revelling in the incompetence of youth. Bankers who have seen just one boom and one bust reach high position in their thirties. And woe betide a banker who has a career break – both banks and regulators believe that causes brain wipe. The short-term nature of banking, ineffective banking training, the mistaken “big swinging dick” culture of trading, and the sheer lack of years of experience provides a recipe for another financial crisis.
Where would football managers be if your experience faded once you’ve left? “Sorry Manchester United, you can’t hire Jose Mourinho because he has been out of the market.”
Richard Harris is chief executive of Port Shelter Investment Management