Five tips for George Osborne on banking reform

These simple steps would provide the direction for deeper reform of the banking system

• 
• • Prem Sikka
  • theguardian.com, Tuesday 26 November 2013 18.31 GMT

Public pressure for better banking reform from George Osborne, the chancellor, is growing. Photograph: Chris Ison/PA

Some six years after the banking crash, the UK taxpayer is still providing £977bn of loans and guarantees (pdf) to support the ailing banking sector. The reform process is painfully slow. The banking reform bill currently going through parliament (pdf) has grown from 35 pages to 170 pages, but still does not deal with the flaws that led to the crisis. Public pressure for a tougher approach is growing, with figures including the archbishop of Canterbury demanding firmer government action. The chancellor, George Osborne, should at the very least do the following five things. On their own, they won't necessarily solve the deep-seated crisis in our financial institutions, but they would provide the direction for deeper reforms.

1. Think outside the ringfence

Introduce a statutory separation of retail banking from speculative banking and not just the weak "ringfence" he is proposing. Despite the crash, banks remain addicted to gambling with other people's money. They bet on everything from the movement of interest rates, price of commodities, oil, wheat, foreign exchange and much else through complex financial instruments known as derivatives. Derivatives have been described by investment guru Warren Buffett as "financial weapons of mass destruction". Derivatives brought down Lehman Brothers, Northern Rock, Bear Stearns, MF Global, Countrywide, Merrill Lynch, Wachovia and Washington Mutual, just to mention a few. Yet no lessons have been learned.

The Bank of International Settlements (BIS) shows that the notional/face value of over-the-counter (OTC) derivatives is about $693tn. In addition, derivatives are traded on exchanges; adding up to a whopping $1,200tn. The exact economic exposure of the UK banking system is probably considerably lower, but is not known. The Treasury's response to requests for information is that the information "is not currently available". So what do bank balance sheets show us? The financial statements of Barclays Bank (pdf) show the dangers. Its derivatives assets and liabilities of £469bn and £462bn respectively need not net off and could expose it to anything from £7bn to over £900bn. The UK, with a GDP of £1.5tn is in no position to absorb the losses and the knock-on effects. Even Nobel prize winners in economics have been unable to manage the risks in derivatives.

2. Hold banks responsible for losses

Withdraw limited liability from speculative banking. Merely separating the banking arms is not enough because banks use monies from savers, pension funds and insurance companies to finance their gambling habit. Major losses from their bets will ultimately infect the rest of the economy and affect every household. Therefore, the owners of these vast casinos must be held personally liable for the losses.

3. Make them balance the books

Force banks to address their gross undercapitalisation. Barclays has gross assets of £1,500bn against capital of just £63bn. A decline of just 4.22% in the value of its assets could wipe out its entire capital. HSBC has gross assets of $2,700bn (£1,687bn) compared to capital of $183bn (£114bn). It can barely absorb the decline of 6.75% in its asset value. Capital ratios in these ranges have not been and will not be good enough to cushion losses. No doubt some will say that some assets are less risky than others and banks will get away with modest capital ratios, but none of this saved banks previously. So a healthy capital adequacy ratio of at least 12.5%, and higher, should be aimed for.

4. End fat-cattery

Risk capital should be built by clamping down on executive pay. No executive should receive more than 10 times the minimum wage until the required capital levels are reached.

Despite the taxpayer-funded bailouts excessive executive pay is rife and remains linked to reckless risk-taking. The long-term solution is to empower bank employees, savers and borrowers to vote on executive remuneration. They all have a long-term interest in the wellbeing of banks and can curb reckless risk taking.

5. Crack down on the auditors

Bring in a fundamental overhaul of the auditing of banks. Big accounting firms, acting as auditors of banks, are supposed to be the eyes and ears of financial regulators, but the lure of profit is too strong. Almost every ailing bank received a clean bill of health (pdf)from its auditors who received millions of pounds in auditing and consultancy fees. In some cases, banks collapsed within days of receiving the all-clear. Even worse, in some cases auditors were complicit in dubious practices. It is time to remove the accounting firms from audits in the financial sector. That task should be performed by a specially created body, equivalent to the National Audit Office. Unlike the present situation, the financial regulator should have unhindered access to all data held by the auditors.

Is there room for intellectuals in cricket?

Ed Smith in Cricinfo 24/11/2011

WG Grace thought reading books was bad for your batting. "You'll never catch me that way," he scoffed. The story serves as a metaphor for sport's suspicion of intellectual life. Thinkers, readers, curious minds: do we really want them clogging up the supposedly optimistic, forward-looking atmosphere of a cricket team?

Cricket is still grappling with the terrible news that Peter Roebuck - one of sport's genuine intellectuals - jumped to his death from his hotel balcony as he was being questioned by South African police about a sexual assault charge. The circumstances of Roebuck's death were clearly atypical. Nonetheless, his life - especially those parts of his life that belonged to cricket - fit the pattern of an intellectual who never quite settled into an easy relationship with the sport he loved.

Other sports are arguably even more anti-intellectual than cricket. Football never entirely understood Pat Nevin. Graeme Le Saux was subjected to homophobic chants and abuse. He wasn't gay, of course - his "sin" was to read serious newspapers such as the Guardian.

In Ball Four, the New York Yankees pitcher Jim Bouton's wrote the first great exposé of major league sport. He described how the management encouraged, almost forced, their players to drink beer after matches. That Bouton preferred milk was thought to be proof that he wasn't a real bloke. He was made to feel guilty for being intellectually curious. Bouton wrote admiringly about one soulmate who liked to lie down in open fields and read poetry. But his intellectual team-mate subsequently denied it.

Let's not pretend that there aren't tensions between thinking and competing. I turned professional at probably my most openly intellectual phase, when I had just graduated from Cambridge University. Perhaps too many things had all happened too soon for me - I was only 20 when I graduated. And we were young and callow and could be a pretentious bunch, with the intellectual bar set ludicrously high. We thought nothing of being habitually dismissive - forgive us, but being dismissive was the style.

From that rarefied academic environment, dominated by abstract thinking and academic competitiveness, I stepped straight into a first-class cricket dressing room. It was a massive change and gave me a huge jolt. And I'm sure I didn't always handle it well. On one away trip, my room-mate picked up the book on my bedside table. It was Experience and Its Modes, a densely argued book by the philosopher Michael Oakeshott. I'll never forget the expression on his face.

Mike Atherton and I once discussed whether intellectuals had any place in modern sport. The best defence is that good sports teams embrace diversity. They are open to all different types, including players who do not naturally fit the stereotype of a team player. The best teams are liberal in the deepest sense. They do not stifle independent thinkers or left-field ideas. They do not enforce conventional, middle-brow behaviour.

For that reason, the worst combination for a sporting intellectual is a losing team and a weak, insecure captain. A losing team searches for scapegoats. During times of insecurity and pressure, as history shows, human groups often turn on unconventional individuals. Insecure leaders want to be surrounded by players of limited intelligence. It is easier that way.

Surprisingly, however, the team's "intellectual" usually has little to fear from the anti-intellectual jocks. No, the real threat comes from the jealousy of the nearly man, the player who fancies himself as a thinker and resents the competition. Team splits often begin with the manipulations of jealous, thwarted players who think they are cleverer than they are.

	The best teams are liberal in the deepest sense. They do not stifle independent thinkers or left-field ideas

Winning, of course, always helps. A winning team is more inclined to look for the good in unusual players. Looking back on my career, the happiest times were when I played under secure captains and coaches. My father, a lifelong teacher, often told me that weak headmasters appoint unthreatening deputies, but strong headmasters back themselves to handle more restless and independent people. I suspect that was one of Adam Hollioake's great strengths as a captain: he encouraged people to be themselves. He could do that because he was happy in his own skin. "I enjoy my life, I want my team-mates to enjoy theirs" - that was always the impression I got from Adam.

Roebuck, I sense, craved that kind of acceptance - in cricket and in life. He once emailed me a long, uncorrected series of acute perceptions and observations. It was classic Roebuck - staccato, direct and unsparing, especially of himself. He wrote: "I realised that I had not actually enjoyed cricket at all. Englishmen love to suffer! I played one creative innings at Somerset and that's the only press cutting I kept. I never really dared again."

He was determined to avoid those errors in his career as a writer. "Always tell the truth in your own way. As a journalist I never go into the office, as I say nothing happens in offices! One has to work hard not to get sucked into 'the operation'. But dare one tread that path? Do you? Professionalism is not an enemy but it has become a mantra. I concentrate entirely in staying fresh - or else work becomes tired, cynical, useless. Cleverness is an easy substitute for thought. Begin afresh afresh as Larkin wrote."

That "Do you?" was one of the most direct challenges I have had put to me.

He had so much more thinking to do, so many more insights to develop. Instead, his innings did not run its full and proper course. "A player goes through three stages - natural, complicated, simple - not many reach that last stage but the journey cannot be avoided. Failure is the problem," he wrote to me.

Roebuck's three-stage journey applies to life as well as to batting. It is deeply sad that Roebuck's life ended while it was still very much at the complicated stage. One day, I hope, the intellectual will find it easier to find a natural role in professional sport.

Former England, Kent and Middlesex batsman Ed Smith is a writer with the Times.