According to the FT the Parliamentary Commission on Banking Standards will this week recommend that bankers’ bonuses be withheld for as long as ten years as a way of making them live with the consequences of their actions. That would be tackling the problem from the wrong end.
The separation of sales and risk lies at the heart of much of what is wrong with British banking. In HBOS the sales culture reigned supreme, led from the top by the super-salesman Andy Hornby, who ended his monthly newsletter with the demand: “keep smiling, keep selling.” Top sales people, whether they were in retail, corporate or international, earned more and had a higher status than the risk departments, which had no hope of making their voices heard against the drive for growth at any price. How many hundred of millions of pound in bonuses were paid out on deals which turned out to be duff we will never know.
Changing this culture back to one where the originator of the loan remains responsible for its risk throughout its life is the role of the board, most of whom have escaped any scrutiny or criticism for their part in the collapse of HBOS or Royal Bank. Corporate governance codes concentrate on process, whereas culture is more fundamental and important. Until banks get that right nothing much will change.
Bank boards used to see their primary duty as being trustees of the deposits of their customers. Shareholders’ interests came second and the management’s interests a long way behind. Now that situation seems to be reversed. You have only to look at the large amount of space devoted to remuneration reports in banks’ annual reports to see that management rewards rank high in board’s considerations, with shareholder value next. Depositors’ cash merely provides the chips to play at the tables.
Since Robert Peston’s first leak of the draft Commission report last week, the suggestion that the Royal Bank should be split into good and bad banks seems to be being watered down. That idea was not bad; Government is stuck with the liabilities anyway and hiving them off from the rest of the bank would enable it to start lending again with a cleaner, stronger balance sheet.
But even that doesn’t go far enough. Where is Archbishop Justin Welby’s suggestion of breaking RBS into regional banks? That would be really radical thinking and would transform not only financial services in this country, but finance for growing businesses too. That’s too radical for any of the political parties. Welby is going to have to call on an Act of God to make it happen.