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Banking on regulation

Optimize Blog - November 16, 2009 - 0 comments

This week we’ve seen plenty of hullabaloo around banker’s bonuses and in Britain the Queen’s speech later this week will outline proposed legislation which will provide the UK Financial Services Authority (FSA) with additional powers to strip bonuses from bankers where they have taken unacceptable risks.
Here at Zeitgeist we get the principle – the current economic crisis was fuelled by reckless profit chasing on the back of the now widely termed ‘toxic loan’ portfolio – but we’re struggling to see how this can be properly enforced.
Interfering with contracts made between two willing participants can become a legal minefield but even more confusing is how the term ‘risk’ is viewed.  Ultimately there are significant rewards for the banks to make deals based on future positions, to anticipate what the future holds by using business savvy, trended past data and good old intuition.
At what point can a regulatory body prove that the risk was unacceptable?  Will they be able to use hindsight or will they need to take into account what data the banker had in front of them when the deal was struck?
This seems one of those ‘fine in theory’ pieces of legislation which will be difficult to enforce we think but no doubt the first test case will not be too far away.  Expect appeals and counter claims to follow immediately afterwards!
What then for Britain’s status as a financial centre of the world?  Will it any longer be able to attract top talent and provide the returns for shareholders which for so long have been taken for granted?  Or will we see banks move their investment and brokerage arms to countries where such regulation is more ‘manageable’.
In all this there seems to be much closing of doors when the horses are already way off on the horizon….

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