As regular readers know, sunshine is the best disinfectant and preventative for bad behavior by bankers.
For banks, sunshine means requiring them to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.
It is this level and frequency of disclosure that is needed so that the market can, for example, identify proprietary bets that would violate the Volcker Rule or bankers trying to manipulate benchmark interest rates like Libor.
A long list of banks in the US and Europe have been shown to have dodged their compliance with a host of rules and regulations – on selling products, repossessing homes, staying within trading limits, pricing borrowing rates and respecting sanctions, as well as money laundering.Bankers could engage in each of these activities because they are hidden behind the current veil of opacity that surrounds banks and their products and promotes a culture of misbehavior.
As it dawns on banks that abiding by the rules is not just a matter of box-ticking, the lowly figure of the compliance officer is being elevated.Actually, this is just a fig leaf that allows banks to continue to engage in bad behavior.
If bankers were serious about abiding by rules and regulations, they would voluntarily provide ultra transparency. After all, ultra transparency is the sign of a banker who can stand on his own two feet because he has nothing to hide.
Right on cue, Monday was the first day in the office for Hector Sants, former chief of the UK’s Financial Services Authority, and now head of compliance, regulatory and government affairs at Barclays.
Mr Sants has a big in-tray....And a far bigger paycheck as he passed through the revolving door from regulator to the banking sector.
In order to fix past problems and better stave off more in the future, there are structural priorities, too. Mr Sants will need to overhaul the whole way in which compliance has been treated at Barclays.
At present, the bank has about 1,400 compliance staff scattered around the world, but there has been no centralised oversight. Instead, many junior executives have reported into business heads – giving ample opportunity for conflicts of interest.
It clearly makes a nonsense of a checks-and-balances system if a business head can quash a compliance concern before it reaches the top of the organisation.
Barclays’ new structure – with centralised internal surveillance headed by Mr Sants and reporting straight to the chief executive – could do a lot to change any lingering culture of rule-bending....Who is more likely to spot bad behavior 1,400 compliance staff reporting to Mr. Sants or market participants when Barclays provides ultra transparency?
Mr. Sants and all his compliance staff may be well intentioned, but they are not fit for purpose when it comes to ending bad banker behavior.
The new empowerment being given to compliance functions at these and other banks echoes a similar elevation accorded to risk managers in the immediate aftermath of the 2008 financial crisis.
Realising that bosses often had no knowledge of a lender’s real risk-taking, banks and their regulators moved to create high-level risk committees, often elevating chief risk officers to the board.We have already seen with JP Morgan and the losses on the CDS trade that elevating risk managers doesn't work, so there is no reason to think that elevating compliance staff will work either.
With the cost of mis-selling, rogue trading or other transgressions routinely running into billions of dollars, it is clear that compliance failures can generate big losses, just as ill-judged credit risk can.
As investors point out, there is an added intangible cost to compliance failures, too – due to the damage done to customer goodwill and broader reputational fallout.
But fixing compliance will be harder than fixing credit risk safeguards.Ironically, fixing both requires the same solution: banks providing ultra transparency.
Behavioural controls cannot simply be reactive or standardised. Rogue traders and mis-sellers can game a system.
Gatekeepers need to work out which rules are most likely to be tested, how they might be broken, and proactively change their checks to catch the transgressors.In the highlighted text, Mr. Jenkins makes a compelling case for why enhanced compliance will not work and end bad behavior.
The way you change behavior in a bank is by requiring it to provide transparency in everything it does. This starts with ultra transparency into its positions.
It is only when bankers operate in the bright glare of sunshine that their gaming the system ends.
The whole process is central to bank valuations, as George Dallas, the head of corporate governance at fund manager F&C, wrote in a report on trusting banks last summer.
“Compliance departments [tend] to focus most fundamentally on [operating] within the law and prevailing regulation. [That] may not go far enough [for] the best long-term interests of the bank, its investors and its stakeholders.”Mr. Dallas makes the case for why banks need to provide ultra transparency... it is central to bank valuations and bank investors and stakeholders can use this information to protect their best long-term interests. Protecting their interests includes sniffing out bad behavior and stopping it.
There are many banks that could benefit from heeding that advice.All of the banks could benefit from heeding the advice and making ultra transparency a central part of how they do business.