Wednesday, November 21, 2012

UK Chancellor urges Parliament not to "tear up" bank approved reforms

The Guardian reports that George Osborne, the UK's Chancellor, asked a parliament committee not to "tear up" the consensus on banking reform.

He asked the committee to support the idea of ring-fencing rather than complete separation of investment and retail banking.

In addition, the Chancellor asked the committee to focus on how banks could adopt something akin to the ethical standards of other professions like medicine.

Regular readers know that the committee can accomplish the goals of ring-fencing and enforcing ethical standards in the banking industry by simply requiring the banks to provide ultra transparency.  Under ultra transparency, the banks would be required to disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

With this disclosure, banks would stop taking proprietary bets as they would worry about market participants trading against their positions.  This easily achieves a major goal of the Vicker's commission of separating gambling from insured deposits.

With this disclosure, the culture of banks would be radically changed as sunlight is the best disinfectant.  Without the veil of opacity to hide their bad behavior, bankers would not engage in activities like manipulating Libor.  Ethical standards would effectively be forced on bankers and the market would act as a disciplinarian for violating these standards.

George Osborne, the chancellor, has urged the independent commission on banking standards to avoid "tearing up" the consensus on financial reform by pushing for a more radical separation of retail and investment banking. 
Appearing before the cross-party commission, chaired by the Conservative MP Andrew Tyrie, Osborne firmly rejected the idea that the reforms proposed by Sir John Vickers to "ringfence" retail banking will fail to tackle the culture that led to the crisis. 
"We have spent two years getting to this point … We are now on the verge of implementing ground-breaking legislation," he said on Wednesday. "I don't think this is the moment to tear up everything that's been done over the last two years."
Since all that ground-breaking legislation does not involve requiring the banks to provide ultra transparency, it is most likely worthless.

The legislation is probably just like the Dodd-Frank Act in that it substitutes a combination of complex rules/regulations and regulatory oversight for transparency and market discipline.  A combination that our current financial crisis shows is prone to not working.

Everyone knows that transparency and market discipline works.  All you have to do is look at the financial system and see that the areas that broke down during our current crisis are characterized by opacity, much of it in the form of complex rules/regulations, and regulatory oversight.

The Chancellor is effectively asking Parliament to gamble with UK taxpayer funds and endorse a known failure (the combination of complex rules/regulations and regulatory oversight) rather than a proven success (transparency and market discipline).
Rather than questioning the Vickers reforms, the chancellor urged the committee instead to examine how bankers could adopt something akin to the ethical standards imposed on other professions. 
"In the medical profession and the teaching profession, we expect certain standards, but which are administered by the profession," he said. 
Barclays, whose conduct in the Libor scandal prompted Downing Street to set up the commission on banking standards, has proposed a new professional body to police the ethics of finance workers....
No surprise that Barclays would recommend a complex rules based solution that protects opacity in the financial system and allows the bankers to continue to engage in misbehavior.

Frankly, no one cares about the ethics of finance workers.  It is easier to put in place a system that removes the need to rely on their ethics.

The system is requiring the banks to provide ultra transparency.  With this system, the bankers know if they do anything that might be ethically questionable they could find themselves on the front page of the news tomorrow.
Lord Turnbull, a former permanent secretary to the Treasury, warned that the so-called "enabling legislation" tabled by the government to implement the ringfencing of banks' retail operations gave too little detail about how the new regime would work. 
"You're not just asking us to buy a pig in a poke, you're just asking us to buy a poke – because there's not much pig in it at the moment," he said. 
The chancellor said it would be up to individual banks to decide what operations, in addition to customer banking, should sit inside the ringfence, which will enforce much stricter rules on how much capital they must hold....
But he said these specific demands could not be directly enshrined in legislation, because it would be a mistake to create a "Maginot Line", reflecting how banks operate in 2012, which could later be subverted, or become irrelevant, as the operation of the financial sector changed.
Don't you love the idea of banks shuttling pieces inside and outside the ring-fence.

One of the nice features of ultra transparency is that it adjusts to how the banks operate.  Regardless of where they have an exposure it is fully disclosed.  No ifs, no ands, no buts.

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