Home / Opinion / Banks under fire. In India, in the UK and the US

The story in India

So it comes to pass that Aniruddha Bahal (the editor of Cobrapost.com, the online magazine that caught on camera bankers in over 20 banks across the country offering to launder money) is after all not blackmailing the banks. Neither, it seems, was he shorting bank stocks. The banking regulator fined 22 banks a total sum of 49.5 crore earlier this week (you can read the Reserve Bank of India (RBI) circular here: http://bit.ly/12FNP9w), making it a total of 60 crore in fines on the top Indian public and private sector banks, vindicating the Cobrapost sting. Ever since Bahal went public with his first tranche of the sting on three private sector banks in March 2013, the banking industry went overtly into outright denial and hair splitting. The more insidious part of the fightback were stories that ascribed motives to the sting operation and the editor of the online magazine. Having tracked retail banking and the rampant use of branches to mis-sell financial products for many years, I know anecdotally that there is muck at the bottom, but the sting not just brought home proof of mis-selling but showed that the problem went far beyond in a systemic way across the industry.

The sting operation was vindicated by an investigation by the regulator that found evidence of large-scale violation of rules and regulations in the banking sector. The investigation has resulted in regulatory action on banks ranging from a simple letter of caution to fines of as much as 3 crore. While there is a problem with the quantum of fines imposed by the RBI — in some cases the fine is not even .05% of the net profits for last year — it must be noted that the fines this time have been counted in crores and not mere thousands, as was the earlier practice of the RBI. The crackdown on Indian banks must be seen in the wider context of the attack on banks the world over by regulators and governments. The world is still recovering from the after-effects of the party that banks have had for the last 20 years where depositors and tax payers paid for the risks bankers took. One report from the UK and one draft bill from the US point to the fact that the battle between the banks and the rest is far from over.

The story in the UK

In June, the British government put out the Parliamentary Commission on Banking Standards report titled “Changing Banking for Good" with recommendations that top bankers be held responsible for their actions, that bonuses to be withheld for 10 years, that jail terms for senior bankers be there for wrongdoing. The report nails the problem with this comment: “Too many bankers, especially at the most senior levels, have operated in an environment with insufficient personal responsibility. Senior executives were aware that they would not be punished for what they could not see and promptly donned the blindfolds. Where they could not claim ignorance, they fell back on the claim that everyone was party to a decision, so that no individual could be held squarely to blame -the Murder on the Orient Express defence." The report aims to correct the unbalanced incentives in banking and aims to “create a new incentive for bankers to do the right thing." The report can be read here: http://bit.ly/10XKKoQ.

The story in the US

Over in the US, the firebrand Democratic senator Elizabeth Warren, who made financial consumer protection her key election issue, has joined hands with Republican John McCain to introduce a bill titled ‘‘21st Century Glass-Steagall Act of 2013’’ (http://1.usa.gov/1aKIW90) that aims to break down the ‘too-big-to-fail’ banks by separating out the boring part of the banks business from the riskier functions of investment banking, private equity and hedge funds.

Writes Warren in her newsletter to her supporters: “Banking should be boring. Savings accounts, checking accounts — the things that you and I rely on every day — should be safe from the sort of high-risk activities that broke our economy." The Bill gives a five-year transition period to financial institutions to split their businesses into basic banking and everything else. The big banks are not happy and the pushback by the powerful banking lobby has already begun. The war chest is getting ready to fight this Bill in the Senate.

The stories from across the world are similar. Banks will use every trick in the book to fight off attempts to make them behave more responsibly and to get senior management to take responsibility. I think the British report has the right idea - use incentives to get the banks and the financial sector to do the right thing.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and Yale World Fellow 2011. She can be reached at expenseaccount@livemint.com

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