Wednesday 27 May 2009

Banking problems

Amid the expenses scandal the Treasury Select Committee published its latest findings on the problems in the banking system. It was generally a good report - it is generally a good and thorough committee - which identified many causes, including Governance, Auditors and Credit Rating Agencies. But its headline factor was problems in the bonus system, suggesting that the regulators were not taking this aspect seriously enough. I can’t see this as being the main reason. Human beings will always push the envelope, be it in banking innovation or expense claims, and unquestionably the asymmetric nature of rewards (reward for success, reward for failure) was a factor.

But because it is human nature to push, it is critical that there is a good legal or regulatory framework. The real problem was the lack of proper controls on bank (and quasi-bank) balance sheets so they over-expanded and created significant off-balance sheet exposure, and that the tri-partite regulatory framework meant no-one had a combination of overall responsibility, market knowledge or experience.

This aspect is to be covered in the next report from the Committee but in the meantime it would be wrong to let jealousy make the focus on remuneration rather than flaws in the regulatory system.

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