Roger Bootle on the Future of Banking Commission

June 14, 2010

BRITAIN-BANKS/

-Roger Bootle is the managing director of Capital Economics. The opinions expressed are his own.-

I was invited to join the Future of Banking Commission by John (now Lord) McFall, then Chairman of the House of Commons Treasury Select Committee, to which I have been a specialist adviser for 13 years.

John is a dedicated public servant and a very persuasive man, as all those who appeared in front of the Treasury Committee can testify. I found it very difficult to refuse his invitation.

As it happens, I had been thinking deeply about many of the questions that the Commission had been asked to examine in connection with my book, The Trouble with Markets, which was published last year. So in many ways, what I experienced with the Commission was rather like seeing the live performance of a play that you had previously only read.

This was the first such Commission that I had sat on. It proved to be a revelation. It was particularly fruitful to be surrounded by people of very different backgrounds – first of all, distinguished members of the three main political parties – David Davis, Vince Cable and John McFall.

We also had highly experienced financial practitioners on board, including David Pitt-Watson of Hermes and the distinguished author Philip Augar, formerly with Schroders. Clare Spottiswoode also had enormously valuable experience as a regulator and Peter Vicary-Smith of Which? brought tremendous experience as a consumer champion.

Father Christopher Jamison, Abbot of Worth Abbey, an adviser to the Commission, provided invaluable advice, not only on ethical issues but also more widely. As for my part, I found myself drawing not only on my academic musings about finance but also on my experience working for two large banks and a stockbroker.

The Commission managed to persuade a glittering array of people to give evidence, including Mervyn King, Governor of the Bank of England, and Lord Turner and Hector Sants of the Financial Services Authority.

Initially the leading commercial banks were reluctant to appear but when they saw the seniority of those who were committed to appearing they too agreed. A whole slew of senior bankers including Stephen Green of HSBC and Stephen Hester of the Royal Bank of Scotland made forthright and helpful contributions.

Sadly, Sir Brian Pitman, who also gave evidence to our Commission, died only a few weeks after appearing before us. His evidence was dynamite. He told us that banking was fundamentally different from other industries in that it was very simple to increase business merely by taking on more risky propositions, and that, if they geared up the remuneration system sufficiently, it was very easy for the senior executives of banks to enrich themselves quickly by pursuing policies  that would ultimately bust the banks.

It was also highly revealing to listen to members of the public whose criticisms of the banks might once have seemed unreasonable, but now appeared right on the mark. I found it striking that many of their criticisms were very much in line with those of so many top academics, central bankers and regulators.

The result is a document which is straightforward, compelling and radical. It is central to the understanding of the Report that the Commission did not seek to add to the pile of literature analysing the causes of the financial crisis. Our approach was to view this crisis as just the latest in a long line of crises, including the dotcom boom and bust of the early 2000s.

The Commission believes that these crises are the manifestation of deep-seated failings in the banking system.

The Report makes 39 recommendations covering the structure, regulation and culture of the banking industry. The structural recommendations include support for living wills detailing how the collapse of a bank would be managed and how customers would be treated, and the separation of investment advice from the execution of trading. This is a more radical suggestion that the revival of Glass-Steagall or the so-called Volcker Rule.

On Regulation, the Commission argues that banks’ boards and not regulators should take primary responsibility for the management and stability of their banks. Regulation should be used to increase competition among banks.

On Culture, the Commission recommends that there should be a ban on sales commissions for frontline staff and that all bankers should be subject to a code of good practice, similar to the codes which apply for the medical and other professions.

All in all, this Report offers a radical approach to reforming the banking industry to ensure that it is both safe and serves its customers properly and efficiently.

Picture caption:  Steam rises from skyscrapers in the Canary Wharf financial district in east London in this file picture. REUTERS/Toby Melville

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