Banking is different

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Adair Turner has an article in the FT this morning. It’s clearly an attempt to justify his decision to appoint PWC to investigate the RBS failure and to then not publish their report, neither of which are too his credit. But he does have interesting things to say:

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.

Failure in banking, or even the threat of failure offset by public intervention, carries huge economic costs quite different from non-banks. In banking, higher return for higher risks is also sometimes achieved not by socially valuable product innovation, but by leveraging up and taking liquidity risks, increasing the danger that society must clean up the mess.

It’s a little bit of s shame that it brought the destruction of nations to make us realise that, when it was glaringly obvious, but let’s move on. He asks:

The question is should we reflect these fundamental differences in a more explicit recognition that the attitude of bank boards and executives towards risk-return trade-offs should be different from other sectors, and should we create incentives to adopt this different attitude? It would, for instance, be possible to set a rule that no board member or senior executive of a failing bank will be allowed to perform a similar function at a bank unless they can positively demonstrate to the regulator that they warned against and sought to reduce the risk-taking that led to failure.

Yes, profit maximising at any risk is bad in other words.

Let’s say it.

And let’s enact it.

But not just for banks.

And in the meantime those banks that won’t play ball need to lose the right to be in the game.