Banging up bankers is the wrong punishment – it won’t change behaviour

The behaviour of the banking sector in the run up to the crash is still very much in the public eye. But this is nothing new. Readers of a certain age may recall Bernie Cornfeld, and his company Investors Overseas Services (IOS). It failed dramatically in the 1970s after allegations of fraud. IOS encouraged the flight of capital from developing countries and tax avoidance in the West. Meanwhile, Cornfeld enjoyed an exceptionally flamboyant lifestyle, had mansions all over the world, threw extravagant parties and lived with a dozen girls at a time – movie stars, supermodels and princesses. The only penalty he suffered was eleven months in a Swiss jail, after which he was acquitted.

It is not only bankers who might find the trade-off between risk and reward attractive. So how do we manage to get them to behave responsibly? Cornfeld was very astute. He remarked “if you want to make money, work directly with money. Don’t horse around making light bulbs.” Clearly, people work in banks because they want to make money. John Maynard Keynes wrote in the 1930s that, if people in the financial sector were not driven by money, the work would be intolerably boring. He went on to say that the markets performed a useful social function. Many people in them exhibit serious pathological tendencies, and the pursuit of money diverts them from violence and crime.

The standard way of discouraging irresponsible activity is by changing the incentive structure. This is what lies behind the recent Parliamentary report recommending jail sentences for reckless bankers. Deterrence is important. But there are two parts to any deterrent: the severity of the penalty itself, and the probability of receiving it.  Andrew Tyrie’s report says that top bankers should not be able to use the defence that they did not know what was going on. But even if the law already permitted jail terms, how would the Co-op Bank debacle be dealt with? It reportedly fell into trouble due to the risky loans of the Britannia Building Society. When the Co-op took Britannia over in 2009, these loans were certified as acceptable by two sets of auditors and the Financial Services Authority. Who would do the porridge? The motives of Tyrie’s report are perfectly understandable. But the risk is that regulators with job security and gold-plated pensions will simply use the wisdom of hindsight to assign guilt. It is easy for a bureaucrat to say that, if a loan ever goes bad, even years after it has been granted, someone must be to blame. Uncertainty about the future is an inherent part of the human condition. Incentives do matter. But their real impact comes when they stimulate permanent changes in attitudes and values in the relevant social network. A statement that, for the next five years at least, no one from the City will be given a peerage, knighthood, or even invited to Buckingham Palace garden parties would work wonders. It would send the clearest possible message that the financial services sector needs to clean up its act.

Paul Ormerod

As published in City Am on Wednesday 26th June 2013

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ALEX O’BYRNE

Associate

e: aobyrne@volterra.co.uk
t: +44 020 8878 6333

Alex O’Byrne, Associate at Volterra, is an experienced economic consultant specialising in economic, health and social impact, economic strategy, project appraisal and socio-economic planning matters.

Alex has led the socio-economic and health assessments of some of the most high profile developments across the UK, including Battersea Power Station, Olympia London, London Resort, MSG Sphere and Westfield. He has significant experience inputting to EIAs and s106 discussions as well as drafting economic statements, employment and skills strategies and affordable workspace strategies.

Alex is also experienced at economic appraisal for infrastructure. He was project manager of the economic appraisal for the City Centre to Mangere Light Rail in Auckland. He also led the economic and financial appraisals of the third tranche of the Transport Access Program for Transport for New South Wales, in which Alex developed and employed innovative methodological approaches to better capture benefits for individuals with reduced mobility.

He is interested in the limitations of current appraisal methodologies and ways of improving economic and health analysis to ensure it is accessible to as many people as possible. To this end, Alex recognises the importance of transparent and simple to understand analysis and ensuring all work is supported by a robust narrative.

Alex holds a BSc (Hons) in Economics from the University of Manchester and he was a member of the first cohort of the Mayor’s Infrastructure Young Professionals Panel.

ELLIE EVANS

Senior Partner

e: eevans@volterra.co.uk
t: +44 020 8878 6333

Ellie is a partner at Volterra, specialising in the economic impact of developments and proposals, and manages many of the company’s projects on economic impact, regeneration, transport and development.

With thirteen years experience at Volterra delivering high quality projects to clients across the public and private sector, Ellie has expertise in developing methods of estimating economic impact where complex issues exist with regards to deadweight, displacement and additionality.

Ellie has significant experience in estimating the economic impact across all types of property development including residential, leisure, office and mixed use schemes.

Project management of recent high profile schemes include the luxury hotel London Peninsula, Battersea Power Station and the Nova scheme at London Victoria. Ellie has also led studies across the country estimating the economic and regeneration impact of proposed transport investments, including studies on HS2 and Crossrail.

Ellie holds a degree in Mathematics and Economics from the University of Cambridge.