December 15, 2011, by Adrian Mateo

We need a fundamental rethink of our approach to banking regulation

The UK Financial Services Authority published its long awaited report on the failure of Royal Bank of Scotland (RBS) on 12th December (download full 452 page report). The report provides a very comprehensive evaluation of the RBS case and is both self-critical, as well as critical of international banking regulation. Nevertheless it lays primary blame for the failure of RBS firmly at the feet of its management – rightly in my opinion.

However, despite the conclusion that “RBS’s failure amid the systemic crisis resulted from poor decisions by its management and Board.” (p23), regulators remain committed to the same old mantra of increased capital requirements and ever more technically prescriptive regulation. This is a serious mistake. As the previous Chairman and CEO of the FSA, Howard Davies, once said: “But we have learnt, from better experience, that no amount of capital is enough if the management in charge of it is incompetent, and the control systems are fatally flawed” (FSA Speech No. 78).  So why do regulators continue to think that next time it will be different?

In my opinion what we actually need is a fundamental rethink of our approach to banking regulation. One that is more about directly influencing the behaviours of bank management. For example, if Fred Goodwin and his senior management team had thought for one moment that they were betting their own financial futures they might have acted very differently when faced with the opportunity to acquire ABN AMRO. Perhaps deciding not to buy it at all, or at least ensuring that detailed due diligence was done beforehand. Maybe it is time for senior bankers to put their own money at risk?

Regulators also need to look more closely at the ‘moral fibre’ and professionalism of senior bankers. Contrary to popular opinion, most of the senior banking and building society executives that I know are very ethical people, who despite pressures from their investors. guide their institutions down a much more sustainable and socially aware path than the likes of RBS. Those without such qualities should not be allowed to run our banks and building societies – since as highlighted by the recent financial crisis it does not take many ‘rotten apples’ to bring the global financial system to its knees.

Dr Simon Ashby (Senior Research Associate of the FSRF and Associate Professor in Financial Services at the University of Plymouth Management School)

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