In previous articles, I set out why it’s necessary to address risk-taking incentives in banks and how losses would be covered from the bonus pool and director’s personal bonds before hitting equity. This article sets out other necessary provisions.
5. Accounting standards
5.1 For the purposes of the Bill, all relevant figures (measures of profit, loss, capital, bonuses, personal bonds posted, etc.) would be obtained using parallel prudent accounting rules i.e. UK GAAP under Companies Act legislation.
This was proposed in my Ten Minute Rule Bill last year: The Financial Services (Regulation of Derivatives) Bill. That Bill was originally inspired by issues around derivatives, but the act of preparing it revealed the general weaknesses of IFRS. My related articles are here.
5.2 The values of board members’ personal bonds and remuneration, all bonuses awarded and the current values of the bonus pool would to be reported in full.
6. Bank insolvency
6.1 Should the ratio of a bank’s core capital to its assets fall below 3%, then the bank would be deemed to be insolvent.
This sets a clear solvency standard: a 3% ratio of core capital to assets is an absolute minimum. A bank with a core capital/assets ratio below 3% is essentially a zombie, i.e., not a going concern, and as such should not be allowed to continue in operation.
6.2 The Secretary of State would be required to place any insolvent bank into receivership.
6.3 In the event of insolvency, the bonus pool and the personal bonds of board members would immediately be forfeit to the creditors of the bank. Board members themselves would be deemed to be personally bankrupt and court proceedings would be instituted to recover their remaining personal property. This property would then be liquidated and the proceeds would belong to the bank creditors.
7. A New Fast-Track Receivership Regime for Banks
The Secretary of State would be required to propose a new fast-track receivership regime to handle insolvent financial institutions. The purpose of this regime would be to ensure that future bank insolvencies are handled expeditiously.
An insolvent financial institution would either be quickly broken up and marketable parts sold off, or else it will be quickly reorganised in receivership and put back out into normal operation. There have been calls for a fast-track bankruptcy regime for banks for years: it is time to provide one.
8. End of State Support and Return of Financial institutions to Normal Operations
8.1 The Secretary of State would be required to present to Parliament a Bill outlining a programme (including a timetable) leading to the end of all state support for financial institutions.
8.2 For the purposes of the Bill, state support would be deemed to include: all bailout support, all lender of last resort support, public shareholdings in banks, central bank holdings of any bank assets and any form of state-supported deposit insurance.
8.3 Future state or central bank support for financial institutions would be prohibited.
9. Authorisation to Operate
9.1 Any banks that operate in the UK would be required to obtain UK authorisation. This means, in effect, that the UK would unilaterally withdraw from the EU ‘passport’ system under which financial institutions established in one member state can operate in other member states with no further authorisation requirements.
10. Criminal Investigations
10.1 The Secretary of State would be required to set up a new Financial Crimes Investigation Unit to investigate financial crimes, and whose focus would be crimes committed by senior bankers and financiers.
10.2 The Secretary of State should direct the new FCIU to begin investigations into possible criminal offences committed in all financial institutions that have failed since 2007 and/or been in receipt of state support (e.g., bailouts).
10.3 Should a financial institution fail, the FCIU would be required to open an investigation into possible financial crimes committed by the senior management of that financial institution.
11. Criminal liability of parties referred to in this Bill
Any failure on the part of any of the parties mentioned in the Bill to fulfil their obligations in full should be deemed to be a serious crime as defined in the Serious Crime Act 2007.
12. Definition of Financial Institution
For the purposes of the Bill, a financial institution would be any company regulated under the Financial Services and Markets Act 2000.
However, the precise scope of the Bill is a matter for debate.
Reference documents are available here.
Tags: Financial Crisis, Financial Institutions (Reform) Bill, Governance, Liability, Moral Hazard, Parliament, Risk