No place in the playbook for fear and intimidation

6 min read
EMEA

HAVE REGULATORS OPTED to instil a climate of fear and intimidation to accelerate their agenda, and is it leading to perverse consequences within banks?

In conversation with me the other day, a guy working for a hedge fund referred to the “storm trooper edge” the European Banking Authority has adopted vis-à-vis local regulators and levels of enforcement actions. That comment came just as I was pondering the question from a wider angle of whether instilling fear had become a new tactic and whether that was the element regulators believe is going to get them where they think they need to be.

I’m not referring here to the wide body of financial legislation that’s been enacted or that is waiting in the wings. The senior manager and material risk-taker regime in the UK certainly pushes bankers up that fear index. Having forced the notion of accountability way up the scale I do wonder whether banks are being set up to fail and individuals left dangerously exposed because the regime is at a certain level unworkable and unreasonable in the real-world context of very large multi-layered multinational organisations.

But no: beyond specific pieces of legislation, I’m referring more to the swaggering and aggressive attitude that parts of the regulatory machine and some of its main protagonists have adopted towards banks and bankers. Let’s be clear: financial regulators and policymakers are firmly in control of the agenda at this point in the cycle. That’s a given. That they have gleefully smothered parts of the banking sector to within an inch of their lives is old news.

I do wonder whether banks are being set up to fail and individuals left dangerously exposed

THAT THEY’VE DONE this – some would say knowingly – at the expense of the economics of banking and potentially harmed the underlying economy into the bargain in the animal spirit of retribution may not be a view shared by everyone but it’s one I have a lot of sympathy with. That there’s been some unbridled regulatory adventurism on display, some smug playing to the gallery of public opinion is almost a matter of record.

BaFin publicly calling Anshu Jain a liar over what he told the regulator he knew about the bank’s Libor rigging was extraordinary. Jain was, of course, totally exonerated and the accusation dropped. But the reputational damage it clearly caused him can’t be erased so easily. The public nature of the charge and its timing – coming as it did at a critical stage of his career, at a critical phase of the bank’s restructuring and just as Deutsche Bank had reached settlement with the US SEC over gap risk valuation deficiencies on leveraged super-senior trades in its correlation book – was a vindictive act. No more, no less.

Recalling what US Chamber of Commerce president Tom Donohue had called the over-zealous methods used by then-New York Attorney-General Eliot Spitzer way back in 2005 (“the most egregious and unacceptable form of intimidation we’ve seen in this country in modern times”), I always thought the tactics that Benjamin Lawsky merrily employed to exact fines and guilty verdicts from banks right up until he left his position as New York’s State’s Superintendent of Financial Services a couple of months ago were coercive and some would say amounted to barely-disguised extortion.

WHICH LEADS ME back to my reference to perverse consequences of regulatory tactics. At the time of NYDFS cases against Barclays (for spot FX violations; US$2.4bn fine) and BNP Paribas (doing business with Iran, Cuba and Sudan in breach of US sanctions; US$8.9bn fine). Lawsky made it personal by directing the banks to fire named individuals as part of the settlements. Not all of those fired were actually guilty.

Christopher Marks, global head of debt capital markets, was forced out of the bank as part of Lawsky’s crusade in March 2014. To all intents and purposes, BNPP was powerless to prevent him from being fired. There was no detail in the DFS consent order as to why he was named among the 13 on Lawsky’s list. As a DCM guy, the connection always looked a little weird. It appears to have been because he is a US citizen. Marks sued the bank for unfair dismissal and lo and behold just a few weeks ago. Both sides agreed that he was dismissed unfairly and I gather he has reached a settlement with the bank.

In a much less public example of egregious regulatory interference, I met with a senior banker recently who had parted company with his long-term employer. Without going into the details of his exit, what struck me beyond the specifics is that it was clear that the bank’s principal regulator had been putting huge pressure on senior management to find senior sacrificial lambs to give the impression that regulatory teeth were not just being bared but actively engaged.

This particular individual was told by the bank’s leaders – and we’re talking major bank here – that while the circumstances of his departure were ridiculous, there was nothing they could do, that they were in the line of fire too and it was him or them.

Having bank leaders mount witch hunts and sacrifice talented senior bankers so regulators can work public approval and leaders can stay on their right side is a truly perverse and disgraceful development. Intimidation does not belong in the toolkit of right-thinking regulators.