But the last 50 pages of the Senate report [on HSBC's money laundering] are dedicated to the failings of the regulator whose role - whether in the US or the UK - is going to be just as critical in rebuilding public confidence in the financial system.
Between 2005 and 2010, the Office of the Comptroller of the Currency (OCC), HSBC’s chief regulator in America, conducted almost 50 examinations of the bank’s AML compliance and found more than 80 problems requiring further attention.
Throughout the period, though, it did not take any serious actions to compel Britain’s biggest bank to make reforms.
In an echo of the accusations the report levelled against HSBC, it was only outside pressure - in this case investigations by local US prosecutors into potential money laundering - that eventually forced the regulator to act in October 2010.The same can be said of the Libor scandal where the regulators knew it was going on as far back as 2008 and only now are they taking action.
“Its record of enforcement at HSBC resembles a lapdog rather than a watchdog that we sorely need,” said Tom Coburn, the senator who, alongside Levin, led the investigation.This same statement could be made about a number of the other financial regulators. For example, the SEC was given the role of ensuring disclosure. So how did it manage to let so many opaque products, think structured finance securities, into the financial system?
The report’s conclusions about this particular regulator’s failings make for troubling reading.
Firstly, HSBC’s deficiencies on money laundering were treated as a less grave matter of consumer compliance rather than something that impacted the “safety and soundness” of the bank. Whatever your definition of safety and soundness, it is hard to imagine one in which money laundering by Mexican drug cartels and those with links to terrorism sits comfortably.
Secondly, the OCC’s examinations typically focused on particular inadequacies.
According to the report, the regulator never tried to join the dots that would have captured the scale of the problems at HSBC exposed in this week’s investigation.
The finding is disturbing because it echoes an approach taken by regulators around the world before the financial crisis. Many were good at sweating the small stuff, but stumbled badly when looking at the bigger picture.
They do, of course, have something of an explanation. Before the crisis almost everyone saw the bigger picture as one in which financial risk had been mastered, allowing the world to skip merrily down the path of uninterrupted economic growth.
But as the financial crisis has made brutally clear, it is not a mindset that is effective when the financial world that needs policing is growing more complex and interconnected.
Fixing that mindset requires cultural and institutional change....None of which can be found in the currently proposed financial reforms in the UK or the Dodd-Frank Act.
Fixing that mindset requires subjecting the financial regulators to their own version of market discipline.
Regular readers know that if there is transparency throughout the financial system, market participants can see when the financial regulators do not do their job. As a result, the regulator who fails to perform can be identified and pressure applied to get them to do their job.
A regulator’s job is, of course, made easier if the bank it is supervising is committed to improving its practices.The beauty of requiring the banks to provide ultra transparency and disclose their current global asset, liability and off-balance sheet exposure details is that it allows the regulator to harness market discipline to encourage the bank to improve its practices.