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19 December 2012 | PR 12/233

City’s reckless directors should be fined or prosecuted, says Loughborough professor

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Professor Maximillian Hall

A Loughborough University academic has recommended that bank directors should be fined or even prosecuted for reckless behaviour in his written evidence to the government on the new finance services bill.

Professor Maximilian Hall told the Joint Committee on the draft Financial Services Bill that a real deterrent was needed to stop a repeat of the problems which led to a crisis in the banking sector.

Asked to give written evidence, Professor Hall said it was ‘worth exploring how directors’ personal exposure to litigation following bank failure can be increased with a view to deterring the type of reckless behaviour prevalent in the run-up to the crisis’.

He said New Zealand had successfully introduced a similar system in the 1990s, and that if the UK did not go down the same route ‘nothing would change’.

“The government has latched on to that, and not just because of what I said; a lot of people have been arguing for this,” said Professor Hall, Professor of Banking and Financial Regulation in the School of Business and Economics.

“They are asking parliament to look into the possibility of tidying up the law, in the sense that they are trying to deter reckless behaviour, maybe by criminalising it.

“At the moment very few people have been disciplined post-crisis. I think only one person was banned from the City.

“To my mind, without that change nothing will change. If you want to change attitudes you have to stop reckless behaviour by hitting people in their pockets, which means taking away their livelihood and/or fining them.

“I think it will go through; the government has realised it is necessary.

“People have been calling for punishment of those responsible for creating the banking crisis, but very few heads have rolled in this country compared to others, like America.

 “People ask “who’s fault was the crisis? Many should share in the blame. Everyone from the slack regulators to the sleepy central bank and the politicians who pushed for ‘light touch’ regulation, as well as the greedy investors, are guilty, but individuals were running these banks. They took the decisions.

“I’d go further than fining them if you can prove it (reckless behaviour), and that’s always the difficulty, proving it in a court of law.

“But the mere fact that they face potential litigation would, I think, cause them to focus their minds.”

The government launched the bill in March to create a new financial regulatory framework under the Bank of England. There is no date for when the final bill will become law but it is in the final stages of parliamentary scrutiny. The Parliamentary Commission on Banking Standards is expected to publish a document shortly.

Professor Hall disagrees with the government’s decision to scrap the Financial Services Authority (FSA) and return supervision of the banks to the Bank of England.

He said: “I think under Lord Turner the FSA has turned itself around and should have been given another chance.

“We are going back to the situation we had when the Labour government came in in 1997.
They gave the Bank of England operational independence and took banking supervision away from them because of their failings with respect to BCCI (Bank of Credit and Commerce International) and Barings.

“Post crisis, the perception is that the FSA failed, so let’s give it back to the Bank of England.

“It’s a yo-yo situation. You can’t keep on like this, changing the name of the regulator according to the latest crisis. In my view it’s a leap of faith to believe the Bank of England will do a better job that the FSA.”

Professor Hall also recommended the creation of a Deposit Protection Agency to operate a ‘stand-alone’ deposit protection scheme. He said an ‘appropriately- designed deposit protection scheme’ can reduce the chances of bank failure by reducing the possibility of a bank run.’

He also argued that banks should be made to hold 10 per cent of their risk-weighted assets in the form of ‘top quality capital.’

In 2010-11, The Basel Committee on Banking Supervision agreed new rules, known as Basel III, requiring banks to hold more core capital, the target being seven per cent of their risk-weighted assets by 2019.

Professor Hall said: “On the capital adequacy front, our research in the School shows that they should go further than the seven per cent core capital requirement. We would argue it should be nearer 10 per cent, which is not far removed from what the Independent Commission on Banking has argued for.

“To its credit the government is moving in this direction but recently has backed off because of implied threats from the banks that this will retard economic growth and will lead to a further slowdown in bank lending.”

−ENDS−

For all media enquiries contact:

Chris Goddard
PR Officer
Loughborough University
T: 01509 223491
E: C.J.Goddard@lboro.ac.uk 

Notes for editors:

Loughborough is one of the country’s leading universities, with an international reputation for research that matters, excellence in teaching, strong links with industry, and unrivalled achievement in sport and its underpinning academic disciplines.

It was awarded the coveted Sunday Times University of the Year 2008-09 title, and is consistently ranked in the top twenty of UK universities in national newspaper league tables. In the 2011 National Student Survey, Loughborough was voted one of the top universities in the UK, and has topped the Times Higher Education league for the Best Student Experience in England every year since the poll's inception in 2006. In recognition of its contribution to the sector, the University has been awarded six Queen's Anniversary Prizes.

It is a member of the 1994 Group of 12 leading research-intensive universities. The Group was established in 1994 to promote excellence in university research and teaching. Each member undertakes diverse and high-quality research, while ensuring excellent levels of teaching and student experience.

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