GREED CONTROL

Don't Punish Bankers For Taking Measured Risks

June 20, 2013 - UBS trader Tom Hayes leaving Westminster Magistrates Court on Thursday, 20 June 2013. Hayes has been charged with offences of conspiracy to defraud in connection with the investigation by the Serious Fraud Office into the manipulation of Libor, Photo credit: Tolga Akmen/LNP PUBLICATIONxINxGERxSUIxAUTxONLY - ZUMAl94
Tom Hayes, a former UBS trader, was sentenced to 14 years in prison last year in Britain for his role in manipulating Libor global interest rate benchmarks. Mr. Hayes argued that he was just a cog in a bigger machine, which the British court did not dispute.
  • Why it matters

    Why it matters

    Overly draconian sanctions could ultimately weaken rather than strengthen the financial system.

  • Facts

    Facts

    • In the Netherlands, bankers must take an oath to uphold integrity in the financial sector.
    • In Great Britain, bankers convicted of “reckless misconduct” can be imprisoned for up to seven years.
    • Germany is considering a code of conduct based on a voluntary commitment by the banking industry.
  • Audio

    Audio

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Eight years after the collapse of Lehman Brothers, the crucial question has still not been answered: How can greedy bankers be prevented from endangering the stability of their own institutions — and ultimately the stability of the entire financial system as well?

Governments and regulators have found quite diverse solutions to this question.

For two years now in the Netherlands, bankers have had to take a sort of Hippocratic Oath: “I swear that I will do everything within my power to increase trust in the financial sector. So help me God.” Whoever breaks this oath is subject to sanctions ranging from training sessions, financial penalties to banishment from the profession for three years.

The dream of a risk-free financial system will never be fulfilled. On the contrary, the essence of the banking business could be defined as the calculated assumption of risk.

The British government adopted even more drastic measures recently. A banking law now includes a new offense called “reckless misconduct.” Bankers convicted of this wrongdoing could be imprisoned for up to seven years.

In Germany, Andreas Dombret, a member of the management board at the German central bank has come up with a sort of middle path. The sanctions-armed code of conduct — in contrast to that in the Netherlands — is based on a voluntary commitment by the banking industry. It is also supported by the state, which does not threaten to put bankers in jail right away.

This compromise could in fact be a reliable means of keeping risk-addicted bankers on a short leash while simultaneously avoiding the side effects of tough sanctions.

It is understandable that people are still furious about the excesses of the financial crisis. Their wish to punish the guilty is only too understandable. But overly draconian sanctions will ultimately weaken rather than strengthen the financial system.

Of course criminal bankers must be punished. But who can really make a precise distinction between bad management and “reckless misconduct”?

The dream of a risk-free financial system will never be fulfilled. On the contrary, the essence of the banking business could be defined as the calculated assumption of risk, with the emphasis on “calculated.”

Europe’s banks are in a precarious situation today: Extremely low rates of interest are devouring margins. Regulators have totally rewritten the rules of the game for the financial industry. And digitalization is tearing apart entire business models.

Courageous and also risky decisions are required to get out of this predicament. But the question is whether bankers will have the guts to make these decisions, or whether they prefer to play it safe and agree to rotten compromises — because they fear ending up in court in a few years because of “reckless misconduct.”

The fact that this is not a theoretical problem is demonstrated by the current situation in London. The legal situation there is making it hard for the  financial industry to attract capable top managers.

 

To contact the author: maisch@handelsblatt.com

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