Wednesday, 8 December 2010

Punishments for failed bank bosses

Robert Peston writes in his BBC blog after a conversation with Lord Turner, chairman of the FSA.
“Directors of banks responsible for catastrophically bad decisions, which put their respective banks in jeopardy, could face a new punishment of having two years' pay clawed back from them.

[Turner] was attracted to imposing such a sanction - which is part of the so-called Dodd-Frank financial reforms in the US - as a way of discouraging banks from taking excessive risks. The clawback of bank bosses' pay would be punishment for misguided or stupid behaviour, rather than for illegal behaviour.”
 Wow! Lots of issues here. First of all Robert, the Dodd-Frank Act that was passed into law this summer does not do that, you should have checked. It provides for a clawback following a restatement of published accounts and applies only to ‘incentive pay’ that would not have been awarded under the restated numbers.

There are also lots of potential problems with this legislation that may become clearer when cases reach the courts. It refers, for example, to clawback if companies are ‘required’ to restate their accounts. Well who certifies that it was unavoidable? Suppose new management takes over and decides to restate the accounting numbers, perhaps to make life easier for the new regime, is that required or optional? See Lane & Worcester for more.

Now Turner is not completely barking, he does explain in an article in the FT that banks are different…
“But banking is not like other sectors. The fact that many banks made decisions in the same way as other companies was itself a key driver of the crisis, a big problem, but not one that regulators had adequately identified. In some other sectors we want bold risk-taking, which might sometimes result in failure, shareholder loss or even the danger of bankruptcy. But banking is different.”
I accept that, but they are also businesses and businesses take risks, that is what they do. If you stop them taking risks then they will decline. It is more to the point to try to understand why checks and balances in the boardroom did not constrain the rush at RBS to acquire ABN Amro. What went on there, if it was so obviously a big risk (as Turner claims with hindsight). Also…Turner admits to errors in FSA supervision being part of the picture for RBS and Northern Rock et al. So will the bosses of the FSA also face collective punishment for failures…perhaps a future case like Equitable Life, say….I just wondered….

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