Sunday, October 16, 2016

ECOBATE 2016 Prof David Llewellyn. More banking models needed for safer UK banking.

Professor David Llewellyn recommends more competition in banking to reduce the social cost of banking crises such as that which affects us still since 2007. He sees the best way to do this is through different banking models. The model that is prevalent in the UK is that of shareholder value banks and a mix is needed so that stakeholder value banks are not only encouraged but increased in number. The historical de-mutualisation of building societies in the UK was at a great cost to the stability of the banking system when these stakeholder banks were privatised, morphing into shareholding banks. The benefits of competition through more models of banks will be far greater than just adding more banks of the same shareholding kind. Typical of this genre will be community banks, savings banks, mutuals and cooperatives. These do not seek to maximise the capital return as shareholder banks do and they are likely to be less hazardous and risky. Some being locally based will encourage accountability through better relationships with customers, which will bring trust and confidence.

'Culture determines behaviour'. The bad behaviour of an individual can be dealt with (say a rogue trader), but the bad behaviour coming from underlying bad culture is very difficult to address. He wants culture to be a regulatory issue. In acknowledging Prof Richard Werner's point that in the USA small banks have a different regulator to large banks, he said that 'economists like competition' and thus competition between different regulators is to be encouraged.  

His overview of where we are now used a pendulum image. Whilst pre-crisis there was great faith in markets now we have swung to great faith in regulations. His 'series of reflections' at ECOBATE 2016 in Winchester under the general heading ' Are Banks Over-Regulated Today?' gave us a fascinating view from this ex-Chair of the EU's European Banking Authority's consulting and advisory body: the Banking Stakeholder Group (BSG). He said he would not have been able to give his talk a few month's ago when he was Chair of BSG as he would have been gagged. Now his views, as he delivered them, were his own. He is Professor of Money and Banking at Loughborough
University. He was co-author of the Bankers Oath.

The challenges for a safe banking system are firstly reducing likely failure of individual banks and secondly reducing social costs of failure if that happens. A perfectly safe banking system could be arrived at through measures such as 60% capital ratios; 50% liquidity ratios; 40% of that liquidity in German Govt Bonds, but it would be useless banking system! The problem, given that the failure rate can be reduced somewhat, is: How can we reduce the social costs arising when banks do fail? He was not for pressing for every bank to be a stakeholder bank at the expense of losing all shareholder banks. He wants a far better mix of both.  

A problem with regulation is that there is a symbiotic relationship between the regulations and banking behaviour. Both respond to each other. Banks will arbitrage the regulations ('game' them) and regulators are tempted to respond with tighter rules. But there are limits to the resulting escalation. If regulation is seen as a free good then the public will always want more of it. In fact regulation has a cost and the price of this must be taken into account. There has to be a trade off between: complexity/safety and simplicity/risk. He said that whilst individual regulations might be reasonable under a cost/benefit analysis, the totality of the regulations might not be. Excessively complex regulation might encourage unthinking 'box ticking'. Current 'one size fits all' regulations don't differentiate between what is needed for a large international bank and a small bank.  He indicated by hand the height of the stack of paperwork of all EU bank regulations - it was at about one metre off the floor.      
  
Why is culture important? Banking culture deteriorated in the years before the crisis and now trust and confidence in the banking system is as low as it has ever been. Underlying culture sets standards and influences employee attitudes which determines behaviour. He is working on a paper to cover what he outlined at ECOBATE as above, on the 'post crisis banking regulatory regime' arising out of his work with BSG.

His lecture was the Keynote Plenary held at the academic part of ECOBATE 2016 which for the first time was held at Winchester University's Business School, West Downs Campus, Romsey Road on 12th October. ECOBATE 2016 was organised by ARBE.

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