Tim Ambler: Reform the regulators before reforming the banks

Tim Ambler is Senior Fellow of the Adam Smith Institute.

The Tame Tigers Association promised good behaviour so the zoo-keepers removed the bars and let the tigers mingle with the visitors.  Unfortunately a number of visitors were then eaten.  The media blamed the tigers and MPs summoned them to appear before a select committee.  The public were all agreed on how bad tigers were and tiger-bashing became everyone’s new sport.

But perhaps it was the zookeepers who should have been blamed. After all, it seems pretty inept not to maintain adequate security around a tiger.

In discussions on the causes of the financial crisis and wrongdoing by bankers, the view that the zoo-keepers, namely the Financial Services and other authorities, should have kept a better eye on their charges gets scant attention. Yes, the banks need to be put back into a more contained structure but first we need at least to re-educate, and maybe replace, the bureaucrats.

The regulatory authorities (which now means those in Brussels) are responsible for setting the market framework – the rules and regulations on the banks. But more important is active supervision – knowing what is going on and promptly dealing with transgressors.

Tigers will be tigers and the authorities should know that.  It is farcical for the Financial Services Authority to imagine that grumbling to Barclays about the attitude of its Chief Executive would transform anyone’s behaviour.  Those fixing Libor should have been prosecuted back in 2006.

The FSA failed to act on the financial crisis even though they knew that Northern Rock was going under, and they failed to act on Libor rigging even though it was common knowledge.  It was only when the US and Canadian authorities began moving in, that the FSA scrambled to get Barclays to agree a publishable settlement.  And after all the legislation about money laundering, where were the FSA’s inspectors when HSBC employees were laundering so many billions that the suds reached even the US senate?

Patrolling the market ensures responsible trading, never mind what the rules may say.  FSA inspectors should be in dealing rooms, not drowning in paper in their own offices.  Knowing and understanding the traders, their habits and ways of doing business is critical.  The FSA was, and still is, overly legalistic and theoretical.  These crises have been allowed to happen not because of the regulations but because of the regulators and their stand-offishness.

The Government now plans to change the banks but not, it would seem, the authorities.  Although the FSA is being divided into three parts, all three will carry on as before in their new structure.  Hardly a job will be lost nor a tick-box form be changed.  Yes, the banks do need reforms, but the priority focus of attention should be on reforming the regulators and their work.  Get that right and banks will behave themselves.