Government policing has ‘little effectiveness’ controlling banks, says MSCI analyst

Transcript

As governments and advisory bodies around the world crank up their regulatory efforts, multinational corporations are increasingly facing major fines – some even in the millions. World Finance speaks to Matt Moscardi, Senior Analyst, ESG Research at MSCI, to discuss whether government policing is enough to regulate the banking industry.

World Finance: Now you have the advantage of having a global perspective on some of these global trends. Do you think that Europe versus the US – is one perhaps doing a more effective job at regulating financial institutions?

Matt Moscardi: I think that they’re going about it in two different ways, and they’re having probably the same level of effectiveness. Which is maybe, little effectiveness.

I think in the US they’re trying to just extract as much money as possible from every bank that they’re regulating for egregious behaviour. And I think in the EU – in the UK they’re trying a very similar with the US approach – but in the EU they just don’t do that at all, and they try a very policy, and kind of, best intentions, approach.

I think in the US they’re trying to just extract as much money as possible from every bank that they’re regulating

Even with the bonus caps, it’s more about best intentions.

I think the banks themselves know they’ve been labelled by the financial stability board as ‘too big to fail.’ They know they have government banking, essentially, because of that. They’re being held to higher capital thresholds, sure. But from a regulatory and policing standpoint, the US and the EU have basically said ‘We cannot necessarily police you in the interests of market stability. We can’t put you at real risk, in the interest of market stability.’

And that means that it doesn’t matter necessarily the approach that regulators take to handing out some sort of enforcement. They’re in a bind. As long as these banks are as large and important to these economies as they are, they’re in a little bit of a bind as to what they can do to begin with.

World Finance: Okay, very interesting! Now can you give me some examples of some of those outliers?

Matt Moscardi: Well, we’re already seeing the effects of this for Credit Suisse, who pleads criminally guilty – or criminal negligence, or, they basically copped criminally as part of their settlement agreement with the US for tax evasion… actually, abetting tax evasion.

And the effect has been roughly zero on the company. And the CEO has said as much.

World Finance: Now Matt, at what point do governments play a role in policing some of those big banks?

Matt Moscardi: That’s a good question! I mean, I’m not sure that there is a point. Until they’re willing to disallow market access, rather than meting out fines which are increasingly substantial, but still not deterring behaviour, necessarily.

I also think that the banks themselves have proven they can find loopholes even when there’s government oversight

World Finance: Okay, now Matt, if Libor was calculated by a government agency, do you think we could have avoided this scandal that hit the US as well as the UK a few years ago?

Matt Moscardi: Partially yes. I think that the addition of a government agency in oversight would at least minimise probably the impacts, or the ability of the banks to collude and change the rates. But I also think that the banks themselves have proven they can find loopholes even when there’s government oversight.

The thing that comes to mind is the municipal market in the US, where there are a number of banks who are actually manipulating the bids, and have paid fines for it. So I’m not necessarily sure that it’s a foolproof way to oversee Libor – or Sibor, or Yen Libor, or any of the other global interbank rates. But I do think the oversight of a government agency, or the direct control of a government agency, would most likely limit the impact. Particularly in non-large bank jurisdictions, where it’s smaller banks with better participation.

World Finance: But still, do you ever worry that as you said, you know, they might be able to reduce the possibility that collusion is taking place, but at the same time, an overzealous regulatory body would just add costs to investors by delaying the process? If they are indeed the ones who are producing these indices.

Matt Moscardi: There are many people making the argument that banks themselves – especially at that size – either need to be regulated as utilities, or they need to be broken into smaller pieces.

Now I’m relatively agnostic, whether or not any of that happens. From a pure research perspective, I’m not sure that the cost argument… I mean I know the costs of compliance are increasing, they’re all adding to their compliance officers. But it’s hard to say how much of that is in response to actual new regulation, and how much of that is in response to scandal, and partially marketing and PR.

I personally am very sceptical of any move that any bank does as purely motivated out of, sort of, compliance or risk management.

In terms of the cost argument – whether or not the increased regulation, or overzealous regulators – would actually add to the costs? I’m not sure that argument makes sense, especially when you offset it with the impact to the banks. And when you’re talking impact, the impacts are incredibly broad and systemic when something goes wrong.

I personally am very sceptical of any move that any bank does as purely motivated out of, sort of, compliance or risk management

World Finance: Okay, but you know there’s a certain narrative that runs through any policing effort, and that’s the assumption that fund managers are out to make themselves money at the expense of the rest of us; do you believe that fund managers are really the ones to blame, or has the regulatory world just been too slow to keep pace with change?

Matt Moscardi: The answer’s probably both; fund managers, the banks, and even the regulators, they act on the incentives they have to act. So if a fund manager is paid to find the loophole and obfuscate and move quickly, then that’s what they’ll do at the expense of anything else. And if the regulators are largely either alums of major banks, or they have ties to major banks, or even if they don’t have ties to major banks – I mean, in the US in particular, most of the regulators immediately after leaving go on to consulting gigs with the major banks – if there’s some incentive to slow the pace of regulation, then that’s what they’ll do!

So I think it’s really a question of incentives. And in the EU, where they’re trying to kind of, cap the incentives… even trying to cap the incentives on bonuses, I think that almost misses the point too. I mean, it’s how you’re paying – the mechanism for pay is much more important than the implementation of pay, and capping the pay.

World Finance: Thank you for the insight; Matt Moscardi with MSCI.