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Control system

Richard Fox The SMP’s View

It is now over 12 months since the sudden closure of Lehman Brothers, which was followed by the frantic attempt to maintain a degree of liquidity in global financial markets. It can now be recognised that the overall impact of these actions has been to rescue the wider banking community and to safeguard financial stability in the short term.

This has, however, been achieved at huge cost and a massive increase in levels of national debt. The servicing of this debt will impose significant burdens on both state and personal budgets for many years. The electorate understands that something has to be done but politicians seem to be shrinking from communicating with them about the situation and the steps that will have to be taken.

In much the same way, both politicians and regulators have been vocal in suggesting that the crisis was caused as a result of irresponsible behaviour by bankers. The bonus culture and the greed of individuals have been highlighted by drivers of a culture of risk-taking, where the upside rewarded the individual while any downside was carried by shareholders and ultimately depositors.

Some of this is true but neither is it the full story as it does not recognise the failings of regulation which did not identify the risks that were being taken and the dangers of failure. The jury is still out as to whether the necessary changes have been made to ensure effective regulation in the future.

What is true is that 12 months on from the calamity, positive steps have still to be made to address the remuneration issue. It could be argued that the politicians have no ability to control salary levels except where the institution is wholly state-owned. Similarly, it is irrational to suggest that a retail bank should not be involved in some kind of whole-sale activity – it is necessary to support normal business.

How one could define that activity which is necessary to support normal business and that which might be considered speculative would create a significant challenge.

“The jury is still out as to whether the necessary changes have been made to ensure effective regulation in the future.”

To ensure risks are properly managed in the future would require regulators to be much closer to the markets than has been the situation in the past. We are talking about controlling individual and corporate behaviour, some thing that is difficult to do without having a constant oversight of activity.

The practical approach might be to require institutions to have procedures which control risk and strengthen the penalties where individuals act improperly, for whatever justification.

Richard Fox is chief executive of the Chartered Insurance Institute’s society of mortgage professionals

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