Vol 8 (2011) - Issue 3

Article preview

The Future of UK Banking: A Golden Opportunity

The Independent Commission on Banking ('ICB') has now published its interim report to the Government. The ICB has been given a rare opportunity to help shape the UK banking industry: the last major review of banking, notwithstanding the Cruickshank Report of 2000, was the Radcliffe report 50 years ago. The ICB’s interim report is just that and, by its own admission, the Commission still has much to do. If it has the appetite, the ICB can undertake a comprehensive and considered review of the sector, and make wideranging recommendations for overhaul.

We recognise that the ICB’s work is taking place in the context of a fast-moving and somewhat uncertain environment in that:

– there are substantial changes that have, are and will continue to, take place in the regulatory and supervisory framework. These changes are not all taking place in the UK in isolation; some are also taking place internationally;

– whilst many areas of the banking sector may have stabilised to some degree, the processes of deleveraging and economic recovery are continuing;

– key asset markets, notably those for residential and commercial real estate, are still troubled to varying degrees; and

– banks and bankers continue to be vilified in some quarters, with insufficient consideration being given to the role of the sector in servicing and adding value to the wider economy.

Because of all of this, there is a real risk that regulatory changes in the UK, particularly those which result in 'super-equivalence', could have unintended consequences and could do lasting harm, both to the UK banking sector and to the wider UK economy. The potential value of the ICB’s recommendations will depend on its sensitivity to this issue and on an open and honest interpretation of what went wrong with the UK banking sector. This paper attempts to present a balanced view of where the real problems lie, and to suggest practical and pragmatic suggestions for change.



Red herrings

Firstly, we can try to discount the characteristics, trends and events that are not to blame for the state of the industry. Many of these distractions are much beloved by pundits and MPs looking for a populist soundbite, and we might assume that many will be firmly in the crosshairs of the ICB’s review. However, a keenly perceptive and valuable analysis would not be waylaid by a sound misunderstanding of what went wrong.



Bonuses

This applies most obviously to bankers’ bonuses. A vast amount of the opinion-forming reaction from the media, political sphere and even supervisory authorities has focused on bonuses. Their size relative to the UK average salary, their cycle-defying prevalence, the link between reward and effort – every element of bonuses has been covered by the press and politicians in exhausting detail for the past couple of years. Banking in general, to the detriment of reasoned debate on the subject, has been turned into a political football – but it is bankers’ bonuses that attract the shrillest cries and entice political parties to compete to be the most outraged.

It is a fact that many bankers are among the best paid people in the country and that sometimes bonuses do not appear to be related to performance or shareholder value. It is indeed possible that there is a link between bonus targets and investment bankers’ appetites for risk. It may also be questionable whether, with the current squeeze on banks’ balance sheets, paying out billions of pounds in reward is a wise business practice.