Last year’s LIBOR scandal was a shock to the body politic in London. Despite all that had gone on before, the public and their representatives were stunned to learn that bankers had systematically undermined the foundations of a global market benchmark — one with London in its name to boot — for personal gain.
British Chancellor of the Exchequer George Osborne felt compelled to launch a parliamentary inquiry. On Wednesday last week, after a year’s work, the UK Parliamentary Commission on Banking Standards finally laid a large egg.
Bankers will certainly regard the outcome as what in England we like to call a “curate’s egg” (served a rotten egg by his bishop, a young clergyman, when asked whether the egg was to his liking, replied that it was “good in parts”). They will choke on the commission’s recommendation of a new criminal offense for reckless conduct that leads to taxpayer bailouts, reinforced by a new “senior persons” regime that would ascribe all bank functions to a specific individual, who would be held personally liable when things go wrong.
The commission argues that “top bankers dodged accountability for failings on their watch by claiming ignorance or hiding behind collective decisionmaking.”
Its members aim to make that impossible. If they have their way, behaving recklessly with banking assets will result in a prison sentence, with no Monopoly-style “get out of jail free” card for the financial masters of the universe.
I can already hear the sound of lawyers sharpening their pencils: the offense must be defined specifically enough to withstand a human rights challenge. However, if implemented, the commission’s proposed regime would certainly be tougher than what is now on offer in New York or other banking centers, and British MPs are noticeably impatient with what they consider the glacial pace of change in global regulation — they want action now.
If the UK does proceed in this unilateral way, what would the consequences be for London’s banking industry? Would New York, Frankfurt or even Paris receive a competitive boost as international bankers, alarmed at the prospect of time behind bars if their derivative trades blow up again, flee the City of London?
Commission members offer two, somewhat contradictory, answers to that question. The first is that, frankly, they do not care.
“The risk of an exodus should be disregarded,” the commission said, adding that the advantages of being a global financial center have been accompanied by serious associated risks to the British economy. Unlike the US, where the financial sector is smaller as a share of GDP, the UK economy has still not recovered the output lost in the post-2008 Great Recession, owing to continued retrenchment in the banking sector.
The commission’s members do recognize that London’s loss of status as a global financial center would be costly in terms of jobs and output, so they developed a second line of argument: “There is nothing inherently optimal” about a level playing field in international finance.
In their view, attempts to develop a single European financial market have forced countries to respond to the failings revealed by the 2008 crisis at the speed of the “slowest ship in the convoy.”
By contrast, “there may be big benefits to the UK as a financial center from demonstrating that it can establish and adhere to standards significantly above the international minimum,” the commission said.