I strongly agree with the hon. Gentleman and I have already made both those points, which he just reinforced. All the amendments that I have tabled on behalf of the commission are about standards. Banking continues to suffer from the effects of poor standards. Even in the seven months that we took oral evidence, we had two more major LIBOR scandals, the interest rate swap scandal, a major bank found to be involved in money laundering in Latin America, and another fined $670 million for sanctions busting in Iran.
It is sometimes suggested that trying to do much about this will drive banks overseas. But all of the evidence we took pointed to exactly the opposite conclusion. Far from imperilling the UK’s global competitiveness, high standards will make the UK a more attractive place to locate. Many good things can flow from higher standards in banking, among them is a restoration of trust. Trust is an essential bulwark to the UK’s reputation as a global financial centre. It is also vital for the British economy. While banks are not trusted by their clients and particularly by SMEs, there will be less lending and less economic activity.
The crisis of standards and trust in banking—and it is a crisis—is multi-faceted and, so are the necessary remedies. None the less, the nub of the problem can be characterised as twofold. First, there has been a lack of individual responsibility at the top of banks. Collective decision making has diffused responsibility and a sense of duty to be vigilant. Secondly, there has been colossal failure of judgment by regulators, with an approach based on pointless data collection on a huge scale and needless box ticking.
In a nutshell, boards were negligent and the system of regulation was found seriously wanting the first time it was tested. Both boards and regulators were motivated by an understandable desire to cover their backs, but their lapses were inexcusable. The lack of personal
responsibility in banks has been aggravated by misaligned incentives. By that I mean bonus and remuneration structures. They encouraged bankers to make short-term gains while the full risks and costs became evident only later. The taxpayer ended up picking up much of the tab.
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Of course, many others played a role in the crisis: Governments failed to put in place the right regulatory framework and got too close to banks; auditors and risk rating agencies took large fees and were found to be asleep; central banks, in the main, were slow out of the traps
The commission’s terms of reference primarily concerned banks. It is to their failings that our recommendations are primarily addressed, and I will speak to them today. The commission examined whether banks could be relied on to sort this out themselves, and we concluded very early on that they could not. We concluded that action was required on many fronts to improve standards. First, it would need to come from the ring fence, but that needed to be reinforced. Secondly, improvements to markets and competition would be needed—competition can often be the best regulator. Thirdly, corporate governance needs to be improved. In particular, it is vital to ensure that remuneration does not, as it has in the past, incentivise excessive risk-taking. Fourthly, regulators need to be better held to account. They need to be incentivised to do their jobs more effectively—a primary duty for Parliament. Fifthly, standards need to be supported by more powerful and effective sanctions in the hands of regulators.
Standards will improve and the incentive to game the Vickers rules will diminish if, and only if, the ring fence is made more robust. If banks try to find holes in the ring fence, they should be at risk of full separation. We argued in our first report that that power should lie primarily in the hands of the regulator, and we called this additional power the electrification of the ring fence. The risk of the shock of separation would be an essential incentive to improve behaviour.