Regulate the regulators before the risk
While giving Diamond a kicking, the failures of the regulator deserve more than a passing mention
So the great and the good have passed initial judgement on Barclays and the Libor manipulation. This morning, the Treasury Select Committee published its initial findings into the Libor manipulations and, predictably, it puts a size 12 boot into Barclay’s former chief executive Bob Diamond.
But is is the almost benign telling off of the regulators that interests me.
The fact that the Committee says that the Libor manipulation doesn’t look good for either the Financial Services Authority or the Bank of England is a masterpiece of understatement.
Since its creation, the FSA has been known for its weak regulation of the markets. Time and time again, the "Financial Supine Authority" - to use Lord Gnome’s sobriquet for it - has been seen to act late, if at all, and to be consistently outmaneuvered by financiers more adept and skilled at the dark arts than the so-called guardians.
As I have consistently said, it is not more regulation that is needed but better regulation. The FSA is up against some of the smartest back-office boys in the world and its only response until recently has been a box-ticking, data collecting quango, more intent on having ridiculous airport type security at its offices in Canary Wharf than to actually, you know, regulate.
Now, some of it was Gordon Brown’s legacy.
Labour enjoyed the fruits of its decision to create the FSA, leading from a light-touch, to almost no-touch regulatory approach, as the City shrugged off the last vestiges of the old-boys club and hit the big-time, knocking New York of its perch as the results of the Big Bang finally came to fruition with a regulator that either didn’t know what was happening or couldn’t know what was happening.
And then there’s the Bank of England.
Jeez. Where do you start. Either the BoE has a role to play in banks or it doesn’t. Merv the swerve veered this way and that to justify either that the Bank didn’t have the regulatory power to intervene or that it had the power to demand the head of a leading UK bank, contrary to the wishes of its shareholders.
So which was it Merv? You seemed content to let the FSA swing but when you became aware of Libor manipulation you blithely shrug it off as not being part of the BoE’s role.
I have to say that watching the BoE since it lost its battle with Brown over regulation has been watching a master class in internal politics. Its asides to media and politicians alike have been fascinating to watch and the patient lobbying will pay off next year when it gets greater powers with the dissolution of the FSA.
But, this more decision-based regulation fills me with dread for one simple reason -- the same players that have been criticised over failing to notice the Libor manipulation, even when told there was a problem, will still be there.
Treasury committee chairman Andrew Tyrie optimistically says that this move into decision-based regulation could see regulators “devote more careful thought to where risk really lies” which could “reduce the regulatory burden and, at the same time, provide more effective oversight”.
I wish I was that optimistic.
Whether they are from the FSA with its many failings in regulation or the Bank of England -- you know those fine people who think that printing money is great and that making a world record for sending out letters when once again inflation misses its target, they will still be there.
These are the people that failed in the regulation of financial services prior to the financial crisis. These are the regulators that consistently are shown to not understand risk -- indeed, it may not even be their role to do so.
There were many failings in compliance and culture at Barclays. Risk managers and compliance officers have traditionally been given back-offices and diligently sent out reports that may actually be read once in a while.
But that is changing. With the traumatic events over the past few years, risk managers are being listened to and with the tidal wave of regulation coming, compliance is also getting a greater role.
But these are changes that banks are making themselves.
It has been a constant annoyance to me that the financial crisis was somehow deliberate: That banks somehow went out of their way to lose money, go bust or collapse the global system of credit.
The risks they took were stupid, not deliberate. That is why risk culture is changing. It is not to say that banks won’t take risks anymore, just that the potential downs as well as ups are better understood.
Bank culture was already changing, precisely because of what hit them.
My fear is that this change in culture will be offset by a heavy handed regulator, desperate to show its political masters that it is doing its job while at the very same time strangling the community it is meant to regulate.
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