Editor's letter: Commons sense - an exercise in public humiliation

News that the Treasury Select Committee’s two reports on the banking crisis had been published in May brought to mind the exercise in public humiliation that some MPs tried to impose on the bankers sat before them. Time and again, we heard questions that made good box office with the constituents, but which had little to do with trying to understand what actually happened and what could be done to prevent it happening again.

One of the reports carries the line, “The apologies we have heard from RBS and HBoS had a polished and practised air,” and I wondered whether the MPs had, instead, expected a wailing and gnashing of teeth.

But as I read on, I began to wonder how these committee reports are actually written. The two of them ­ one on dealing with the failure of the banks and the other on corporate governance and bank remuneration ­ were published within a fortnight of each other and add a further 250 pages or so to the body of knowledge relating to the credit crisis.

The second report carries the sentence, “We consider that fair value accounting has featured an element of pro-cyclicality through its interlinkage with the Basel capital requirements.” Fair enough ­ but I couldn’t quite reconcile that with the show trial seen recently on television, nor with a body of elected representatives who struggle to add up their expenses properly. (For the benefit of any MPs, voters or libel lawyers who may be reading this, we have not yet read any mention of any of the members of the Treasury Select Committee in the Daily Telegraph’s recent reporting ­ apart from George Mudie (Lab, Leeds East).)

There is some good stuff in these reports, to be fair (raises eyebrows, steps back in admiration), though I wouldn’t want to sign up in full to all the recommendations. Identifying not only the overconfidence and over-optimism of the banking industry is one thing, but extra marks go to the committee for saying in paragraph 1 that “the stifling of contrary opinions” also played a significant role. When I read the line, “Their judgement was further clouded by the strong correlation between complexity and profitability,” I was almost demanding an immediate election so I could vote again for my current MP. And it’s a charming turn of phrase that says, “We do not think it is in the national interest for UKFI [which owns the taxpayers’ stake in the banks] to remain so enigmatic a body.”

There are some sensible suggestions (glass of water, please) to create some transparency in over-the-counter derivatives trading through a clearing house. And what the committee says about remuneration is entirely in sync with what I’ve banged on about for years: that if you pay people to do something, they will generally do it. If you want them to do something that doesn’t feature in their pay packet, don’t be surprised if it’s deprioritised ­ little things, like considering systemic risk while creating humongous new spreadsheet models.

I urge you to download your own copies of these reports. We’ve given them ‘tiny URLs’ so they’re easy to find: http://tinyurl.com/tsc-bank1 and /tsc-bank2. As financial management professionals you’ll find lots to keep you interested ­ not least what the committee says about auditors (which I’m not so supportive of). As voters and shareholders in these ruddy banks, you really ought to know.