Wednesday, December 8, 2010

Upholding Newton’s 3rd Law with UK Bank Bosses


It seems that for many situations among failed banks around the world today, responsibility seems to be avoided by the upper positions of big banks.  As talks of hits on investors for the recent bail-out of Ireland continue, the UK’s Financial Services Authority (FSA) is looking towards the bosses themselves, BBC reports. 

In the report, discussions that bosses of failed banks in the UK could face a “pay claw” of two years due to excessive risks the banks chose to take, one of which was the Royal Bank of Scotland (RBS).  Lord Turner, chairman of the FSA, has stated that this will encourage more appropriate risks established by banks, in hope to avoid any more bank failures.  Also stated is that rulings may also lead to individuals losing privileges to work in the banking sector.

The RBS had to be bailed out two years ago and suffered no consequences at the time being.  FSA officials had stated that there was no support to punish individuals because of the ill-advised risks that the bank ended up taking at the wrong times. 

It seems that there is a common trend in who actually deserves the blame for when banks fail, but it does need to be made clear to many that though high risks can obviously yield high rewards, it is not ideal when the risks can cause the dismantling of the banking system.  Even though pay claws, as stated in the article, are a rule surveyed in the US, the overall responsibility for big banks to bounce back from these risks does not seem to get fully resolved.

Since bank directors are those acting on high risk investments, should they be the ones who take the hit if the bank fails?  What needs to be done to limit high risk banking investments and who should be held responsible for the banks that may fail?  Would it be right to put full blame on these banking directors, or perhaps should investors be more cautious in where they place their money?

(Post by Evan Amano)