Prickly Don't Mean Ornery: Financial Reform Or Status Quo?

Financial World asked some of us grumpy old financial types for quick thoughts on what the government should do with regard to Vickers – and when. A couple of years ago I went on tour with my family (you can go on tour with your family?). In honour of our father the emblazoned motto on shirts and towels was “prickly don’t mean ornery”. Well, actually it mostly does (meet Dad), which gets you all riled up again. If there is any depth to the tour motto it is that bad temper alone won’t achieve much; you need to be stubborn as well.

We are four years into a series of financial crises dramatically marked by Bear Stearns and liquidity shocks in 2007, followed by Lehman and RBS failures, Irish and Icelandic collapses, and Eurozone earthquakes. Yet there have been no financial reforms to match the magnitude of the problems. I can be prickly. In 2009 Bob Giffords and I wrote a CSFI booklet, “The Road to Long Finance: A Systems View of the Credit Scrunch” in which we argued that people should recognise that leverage and regulation led to more risk rather than less, and that banking competition should be at the centre of debate.

I can be ornery too. By late 2010, three years into the crisis, I had become a supporter of the Independent Commission on Banking (ICB). I wanted reform, some reform, any reform at all. At the 2011 Chartered Institute of Securities & Investment Annual Conference, Alderman Alan Yarrow said we are living in a “cloud of risk aversion and mediocrity”. When we look back on the first four years of responses to the financial crises I think we’d all agree it’s been a cloud of risk commissions and mediocrity. Scarily, and something I contrasted publicly to uproarious objection in 2008, the financial crisis of 1929 didn’t result in genuine reform starting till 1933, four years later. As Status Quo points out, I’ve been a “little dreamer”.

All commissions contend with the battle between the ‘right’ answer and the status quo. The ICB is no exception. In my opinion the status quo has won the battle in three ways. First, and most often raised, the ICB isn’t yet reform, and certainly not urgent reform. Odd that implementation is five to eight years away from crises only four years behind us. Second, the ICB shied away from virtually all reform risk, encouraging hundreds of new banks or mutuals again, portable account competition, utility banking, zero leverage banking. No risk, no reward. Third, the status quo have a few years yet to find ways of entrenching the current state of affairs. Rather conveniently for the UK status quo, the press shout “sovereign debt” or Euro crisis, not “yet another banking crisis”, letting off additional pressure for genuine bank reform.

I still support the ICB’s recommendations, any reform in a storm, but the outlook for genuine reform is bleak. The ICB shines a chink of light through the wall of the status quo. Reform might be possible. And we’ll certainly have a lot of time to think and discuss what kind of reform we might want. The Long Finance initiative continues to ask, “when would we know our financial system is working?” We return time and again to two big themes, a need to link economics with communities and the nature of money. We discuss reforms ranging from reinventing money to utility banking to confidence accounting to pensions indemnity assurance.

Sadly though, I think London may be the big loser. Our firm runs the Global Financial Centres Index and we have tens of thousands of opinions on 100 centres. More and more people opine that financial sector regulation in London is really regulation from Brussels, but that the corridor from London to Brussels is blocked, by Londoners. Surely we can’t fail to have noticed the scale of financial crises surrounding banks? As the leaders in European and global finance can’t we say sorry? Whenever Brussels suggests reform we say “no”. Our trade associations and our leaders just say “no”. Yes, Brussels has had daft ideas on offshore centres or hedge funds, but as leaders we should teach and lead them, not just say “no”.

When other European industries have a crisis they don’t “get engaged earlier with Brussels” (a London mantra for the past few decades), they initiate and lead. The Germans would write their own EU directive after a manufacturing crisis, the French their own after an agricultural crisis. A London Directive would have each of the various financial services, banks, auditors, rating agencies, exchanges, clearing houses, and even insurers, propose one genuine EU reform they would support to make financial services better or more robust. Banks on separation, competition or leverage; auditors on indemnification; rating agencies on Basel; exchanges on high frequency trading; clearing houses on OTC.

I’d like the leaders of London - led by the City of London or the Mayor or any of the expensively-funded promotional or trade bodies – to get financial services firms round to draw up the London Directive. Just developing the London Directive would be a “mea culpa”; admitting you need reform is the first step. Something, anything to show we can lead. Yes I’m stubborn, and proud of it.

[An edited version of this article appeared as "Prickly Don't Mean Ornery: Financial Reform or Status Quo?" Views on Vickers: Responses to the ICB Report, (November 2011).]