After the Libor-fixing debacle at Barclays it is clearer than ever that the UK's banks need to be repaired. Retail and commercial banking, which channel the economic lifeblood of British consumers and corporates, can no longer be at the mercy of the risk-takers of the investment banking world. Deposit-taking banks (or their divisions) must return to acting as agents only for their clients, ending conflicts inherent in the post-Big Bang model whereby capital is risked across the bank's activities.
Systemically important institutions such as UBS or Société Gé*érale can lose billions at the hands of unscrupulous 30-year-olds who can wreck the lives of tens of thousands of depositors and fellow employees at the push of a button. Even the mighty JP Morgan turned out to be too big to manage, making huge losses at its once famed treasury department.
The Vickers inquiry recommended ringfencing the banks' retail and investment operations, and higher capital requirements. It is hard to explain why we would need to wait another seven years for that. We should adopt these measures soon and convince our US friends it is in their interest to do the same. Further, compulsory debt-equity swap arrangements, will force bank bondholders to "bail-in" banks in trouble, reducing the "bail-out" burden on the long-suffering taxpayer.
The "casino banks" alone did not cause the UK credit crunch. Arguably, the foundation of the crisis lay in retail banks' risky lending practices. No one could accuse Northern Rock, or Bradford & Bingley, of being "investment banks" of the type from which Vickers recommends depositors should be shielded. In fact, the greatest dangers to these retail banks were not investment bankers or proprietary traders, but their own lending practices.
Rather than focusing on measures to mitigate the effects of bankers' excessive risk-taking, we should concentrate on how best to limit the impulse at the source.
This has been one of our key priorities at the NCI, a think-tank comprised of practitioners with an independent, expert voice on the future of financial regulation. As owners of our own businesses, and co-investors alongside our clients, we understand what we call "alignment", where financial investors and their clients share the same interests. Without it, financiers have a vested interest in maximising risks and potential rewards. Heads they win, tails their clients lose. Going back to the City's client-centric old-fashioned approach is now overdue
Large banks cannot return to the owner-manager model which made the success and glory of their early years. But simple measures should enable these gigantic institutions to return to the ethos which will reconnect them with both their clients and shareholders. Restoring trust and sustainability depends upon devolving responsibility to bank employees through proper alignment with the outcomes of their decisions.
Coercion from the top is much less effective than responsibility and reward at every level. The rapid UK expansion of the Swedish Handelsbanken shows there is a strong demand for banks where decisions rest with the people best placed to make them – those who deal directly with customers in the bank's branches. These are the small businesses currently charged for making a deposit, and stumping up £30 for the pressing of a button to transfer cash. Senior employees could be asked to lock up for a few years a significant proportion of their bonuses in the very products they sell to their clients every day.
Such common-sense solutions should primarily be the responsibility of the boards of banks, rather than the regulator. These boards must be expert and independent. The chairs and directors of banks must have adequate industry knowledge, and must hold executives to account more powerfully than the boards of many prominent banks have done recently.
One of the major issues for investors during the last financial crisis was the opacity of banks' balance sheets. Who knew what losses were being concealed? We have previously proposed an independent "risk report", to be produced by an appropriate third party and made public in the same way as an audit report, written in a language understandable by all and providing an unbiased assessment of banks' sensitivity to changes in the economic environment. This would help reassure investors and large depositors.
Finally, the Bank of England, not individual banks, should be responsible for certain functions which are vital to the entire UK financial system, such as setting the Libor rate. The misalignment of interests caused both the 2008 crisis and the most recent scandals. Without significant improvement in this area, we are not any closer to preventing credit crises in the future.
Daniel Pinto is chairman and founder, of New City Initiative and chairman of Stanhope Capital