Fixing our banks: now we know the answer

We had another round of debate about fixing the banking system at the Financial Services Club this week (read Part One here). This time it was the turn of the shareholder, media and industry to air their views, ably represented by:

• David O'Hara, Shareholder and Activist Investor, Blackthorn Focus;
• Nick Kochan, Author and Journalist; and
• Brian Mairs, Former Head of Strategic Communications, the British Banker's Association.

David kicked things off with a palpable sense of anger at the losses he and other shareholders suffered at the hands of RBS and Lloyds.

Or was it at the hands of the government, who used these banks as political footballs to kick about in the last few years, ignoring those who made losses.

The room however hardened attitudes as they heard David talking. After all, shareholders should be more aware of their investments and keep a keener eye.

David responded valiantly, and made it clear that the transparency of governance in banking was a key fault here.

He pointed fingers here at the regulators, with the Financial Services Authority full of failed bankers and the Bank of England stuffed with academics, a place for economic graduates to find a job as an economist.

Harsh words with some truth.

Nick also had harsh words, but this time for his own profession.

He felt that journalists were neutered during this crisis and responded incredibly poorly as investigative journalists to the issues in the banking system. This is because most are just cut and paste workers, rather than people tasked with a real passion to seek the truth.

This struck me as a little off-key, as there are plenty of social media investigative journalists out there such as Ian Fraser, a previous speaker at the Financial Services Club (coincidently with Nick as his co-speaker).

But then Nick was getting at the mainstream media who have been nobbled by the Leveson inquiry, have owners often in cahoots with bankers and politicians, and who are easily paid off by lobbyists.

Nick felt this was therefore a failure of media in covering the banking crisis.

Not sure myself, as banks had plenty of front page news in a negative form over the past five years, and I’m sure they would prefer back pages rather than front.

have written – and what I would ask you to revise your blog entry to reflect – would be something more like this:

Finally, Brian responded by pointing out the pejorative language which was cloaking the fact that much constructive work was being done to change the face of banking. There was too much talk of silver bullets rather than magic bullets (silver bullets do one thing well – kill werewolves – while magic bullets are potent cocktails of drugs used to alleviate the symptoms of disease).

The first step in fixing the banks is therefore to use a magic bullet combining three key ingredients: strengthened capital and liquidity; structural change to protect depositors (so-called ringfencing); and recovery and resolution plans (so-called living wills) to protect taxpayers from having to intervene in failing banks.

But even this is not enough if trust cannot be restored with customers. This is what the banks are currently focused on, and it won’t be a short process.

There was then a general discussion around all of these themes, with ring fencing being a particular concern. Many felt that, even if you do ring fence and electrify the ring fence, things can still go wrong. Just look at Jurassic Park …

… and living wills are another concern.

After all, living wills are similar to talking about zombie banks, it just does not sit well with the reality of what we should be focusing upon is getting the regulations right.

For example, it was interesting that both Brian and David agreed that the broad based banks were the strongest banks. Banks need diversity and hence the shutting or splitting of investment and retail operations of the broad based banks is potentially a mistake.

Similarly, during the Q&A, it was clear that all three panellists felt that this crisis was a failure of effective regulation and therefore the new climate should focus upon getting the regulation right.

That means dropping the political puff and smoke (unlikely), ignoring the media mayhem (unlikely), getting to grips with the core essence of the banking system (difficult) and co-ordinating a global response (impossible?).

I guess the culmination of the two nights of debate can be summarised best for me by saying that if the culture of banks is steered towards being socially useful, then the regulatory regime should not have to be the focus, as the industry would self-regulate towards society’s good.

That’s where the real failure of the system occurred in the past two decades and is where the focus of the change has to be for the next two.

Let’s see what happens.

Background:

David O'Hara, Shareholder and Activist Investor, Blackthorn Focus
Nick Kochan, Author and Journalist
Brian Mairs, Strategic Communications, the British Banker's Association