A modest proposal
In the week after the Parliamentary Commission for Banking Standards issued its final report, here are my alternative suggestions for reform in the banking industry. They include three new criminal offences – sufficient surely to secure the next election for any politician willing to adopt the plan. And I’ve kept it short enough for their attention span.
Instead of ring fencing, there will be total separation into Banks and Nonbanks – broadly utilities and casinos, but they will be far smaller businesses in which the shareholders are connected only to the specific businesses they choose to invest in. Nonbanks will be totally unregulated. But only Banks will be allowed to take deposits from the public.
Restrictions on Banks
Banks will be tightly regulated, monoline businesses (e.g. retail mortgages or small business lending only).
They will be subject to a negative pledge so that no assets are pledged to any lender.
Their capital structure will consist of nothing but ordinary shares and senior deposits or loans. There will be no hybrid instruments, with or without misleading names such as investment bonds.
They will have a maximum leverage of 10:1.
Their directors and staff will receive nothing but fixed salary, paid in cash and capped at 33 times the national minimum wage.
If the aggregate staff costs exceed 10% of net revenues in any year, the directors shall be obliged to review their business model to ensure this will not recur.
Deposits will be fully guaranteed by the Treasury.
A senior regulator will take personal responsibility for the running of each Bank.
There shall be a new criminal offence of Reckless Supervision which will arise if the Bank for which the senior regulator is responsible suffers a major reduction in capital (i.e. losses amounting to 25%). The offence will carry a jail term of up to 10 years (with remission if the Bank recovers during this period).
The boards of Banks shall be required to include a majority of individuals with first class degrees in a numerate discipline (i.e. mathematics or physics; economics does not count). There shall also be a majority of those who have demonstrated their independence by, at least once in their career, having resigned from previous employment for “strategic differences”.
No rescue for Nonbanks
Nonbanks shall be free to invest in anything they like, raise capital, have unlimited leverage, pledge their assets, execute derivatives with anyone etc., but there will be a law prohibiting any rescue of a failing Nonbank.
There shall be a criminal offence of Reckless Investment Management where an investment manager (i.e. one looking after other people’s money) invests in a Nonbank unless he can demonstrate that the Nonbank had a credible business plan that did not simply add leverage to speculation.
It shall be a criminal offence for any politician to claim to have fixed the banking system when he has failed to do so. Politicians shall also be prevented from claiming that the banking industry is a major contributor to the British economy until they can explain how the perpetual motion machine shown above works.