Segregating bankers and regulators

Back in the 1990s a bank was getting a difficult time from the regulator. The regulator didn’t have the same muscle as today but it could still restrict activity. Did the bank improve its risk control? No. The regulator was enticed to join the bank and the bank was off the hook. Maybe a good solution then, but now? I think not……. The regulatory system is being used as a stepping stone for bankers. This is dangerous. It damages wider trust and doesn't make banks safer. In these difficult times some resourceful bankers are using the regulator as an employer of choice. In a world of risk this is eminently sensible for them but not for the rest of us. As we know bankers follow the money so when things change will they stay or will they go? In the meantime you have to ask whether their judgement in a regulatory capacity will be truly impartial or whether it will be influenced by their peer group aka network (which incidentally includes trade bodies and lobby groups) and also where they aspire to be in the future. The risk of having a foot, so to say, in both camps needs to be averted.  It is a conflict of interest. Furthermore that’s not the end of the story. As regulation becomes more complex fewer people understand it. Regulators become the experts in a field where they make the rules. Large banks then hire them to exploit the very rules they have created either by technicality or latterly by “regulatory facilitation” (knowing how the regulator works and who makes decisions). This is a conflict of interest. It benefits the large at the expense of the small and encourages complexity above pragmatism.  Reduced leverage not regulatory arbitrage makes banks safer. But here is the real damage. Ask the man in the street and he can’t understand why since 2008 many more of those in charge (and that includes bankers, regulators and auditors) haven’t been shown the exit.  And he certainly can’t understand why more bank directors haven’t been banned or faced criminal prosecution. It’s not just the cost of bank bailouts. It’s PPI, swaps, payment disruption, Libor and RBS. His simple understanding of finance tells him it’s the Old Boy network. Does it matter? It depends on the importance you place on money. Chipping away at trust is corrosive. Sound money requires a sound banking system. That’s one that’s trusted by everyone. Preventing the regulatory system from being a stepping stone in banking careers would be one measure that would help to restore lost faith. We aren’t in the ‘90s.