Banks need to have safety measures spelled out

In view of the globalised nature of business, systemic risks can arise especially when one major component is not strong; any weakness or problem can have a spillover effect.

There will inevitably be reforms in every banking system. The issue is at what stage are these reforms at, and what are the reactions that they generate? In the case of banking, the US banks are already in the midst of reform, post financial crisis.

The Asian banks are in the midst of building up strength, and are coming up with stronger regulatory systems. The British banking system has yet to come up with a comprehensive overhaul of its present structure. By the time it comes up with a solid list of changes, the others will be way ahead of them.

In view of the higher capital required, they have to work on raising capital. This means a lot of time and pressure on them to tackle all the challenges while not lagging behind the others. One would not be surprised if higher capitalisation needs drive the British banking system into a mode of mergers and acquisitions.

The larger and more aggressive banks like Maybank and CIMB may even be considering stepping further ashore, other than just the region.

The exchange rate can be a daunting factor but it is at a better level than before. In fact, the large funds have moved in to purchase property in London. A recent survey quoted by The Telegraph indicated that the city now has the most expensive property in the world.

In his speech, Tucker also mentioned payment of bonuses and salaries, which is a sensitive issue relating to compensation and the amount of effort put into a job. Any perceived reduction in compensation can psychologically affect the drive and productivity of staff. Cash is the immediate incentive. Payment of salaries in subordinated debt, as suggested by Tucker, is a very long process. That is despite the fact that creditors get the first bite in the event of bankruptcy.

This method of payment may act as a disincentive instead, as it is observed that it may be useless to hold debt in venerable 100-year-old banks that can collapse overnight.

On the other side of the coin, this method of payment may prove to be an incentive to perform well, in a disciplined and sustainable manner, with great care on risk management. Knowing that they are a part of the company, the staff will probably do their utmost to protect its interests.

However, external headwinds and systemic effects may be beyond their control. To be convincing, there needs to be, perhaps, huge cash upfront in terms of bonuses and salaries. That may act as a buffer in case things fail and the company goes under.

True, creditors of subordinated debt get the first bite, but what is left to bite can be questionable. In banking reform, things have to be spelled out clearly. The havoc that arose in the aftermath of the financial crisis indicated that many things had not been properly spelled out. Major regulatory reforms were put in place only after realising where the weaknesses were.

Having learnt from those bitter lessons, it is obvious that there cannot just be a “broad balance” between safety and working for future prosperity, as suggested by Tucker in the same gathering of bankers.

Safety measures have to be clearly spelled out and monitored, while working for future prosperity can mean a vast number of things that would be mainly profit driven with some social elements. Safety and social considerations that are well spelled out would reflect the disciplined and ethical aspects of banking.