When in London my trips wouldn’t be complete without meeting up with Clive, an economist with sound background in history and politics who has been working as an investment banker in the City of London for 20 years.
Our conversation over dinner in central London recently discussed how banking should be extricated from its current malaise and public opprobrium. Financial regulators appeared weak in recent times especially during 2008. He questioned the need and justification for the Bank of International Settlement in Basel, Switzerland (BIS) continuing to insist on higher capital requirements with its new Basel-3 requirements. These coming relatively soon after the less effective than hoped Basel-2 regulations which were in place during the worst of the 2008 melt-down of global financial institutions.
Let banks be banks. Let them take deposits and lend to credit worthy customers was an expressed desire. He was generally in agreement with the coalition government business secretary Lib-Dem Vince Cable to remove any link between investment banks and retail banks adding that retail banks should have a government guarantee on the depositors only. Vince Cable has already suggested the state-owned RBS could remain as a state controlled business bank**. Although yet not a widely supported idea.
I added that the ending of the “too big to fail” mentality and a meaningful change in the awarding of bonuses as important milestones in new a banking environment since the Vickers report on banking reform in 2011. Clive said many bonus awards already have been curtailed. I, however, remain a little unconvinced of the real cultural change in the banking and wider financial services industry. It’s the products (and their social use) that matter. He continued bonuses should be given to those employed by companies with the right capital structure. We both suggested what various types of structure these could be, namely: limited liability partnership, or even good old fashion partnerships that existed before deregulation arising during the last Conservative Government of 1979-97. Perhaps using the considerable legal abilities in the UK to produce a new type of legal structure for investments banks and boutiques was proposed. It was next discussed that the rating agencies role be reduced to that of financial DNA sample takers. Entrusting the rating agencies with almost divine authority in risk assessment and credibility has proved overly generous.
At the end of an evening of delicious French cuisine, wine and conversation it was concluded that the abilities of the UK financiers were worth having as an important UK resource. However time once again-just as the original idea of a limited liability joint stock company allowed the industrial revolution to develop in the 18th and 19th centuries- for a new structure which allows, depending on your viewpoint, financial innovators or gamblers to flourish. However they should never again require the country to bail them out of difficulty caused by their rapacious behaviour.
LDC
**Further reading-FT article on the 8/3/2012: UK economy: In need of steering by Brian Groom and Andrew Bounds