Any partner of a bank had the duty and right to warn against and take steps to constrain another partner from taking excessive risks, if such risks could bring down not just the culprit but all the partners who were jointly responsible for the well-being of the firm. In contrast, in modern times, banks operate predominantly in the form of limited companies, often listed on stock exchanges, with very diverse public ownership. Senior managers who run the bank do not have most of their personal worth tied up in the firm and the prospects for life-long employment have become few and far between. Nowadays (in particular during the period preceding the GFC), senior bank managers are generally rewarded by a combination of very high salaries coupled with very substantial annual bonuses tied to performance in the preceding year. Even where share options are included in their remuneration packages, the lock up or vesting period is relatively short – just a couple of years at most. The effect of this change is that the previously strong alignment of long term interest between bankers and customers has been materially weakened, leading to the classic situation of an agency problem, with the bank management using depositor funds to leverage up the scale of business while the downside risk that they face in doing so is limited.
The GFC has also undermined the belief that banks can look after themselves in efficient markets and that “de-regulation” and “light touch supervision” must be good as they promote financial innovation and diversity. As a result of these bitter lessons, a series of profound reforms championed by the G20 and the Financial Stability Board, of which the HKMA is a member, have been introduced to make the banking and financial system much more resilient to shocks. An informed banker will tell you that banks nowadays have to comply with a very long list of stringent standards in capital, liquidity, leverage, margining, risk management, derivative trading and reporting, etc. At the same time, there are new and strong measures designed to address misconduct risks, ranging from anti-money laundering and counter terrorist financing, front-running, insider trading, mis-selling of financial products, etc. 13. For those bankers who feel disappointed tonight because they cherish the hope that they would learn some clever tricks to get rid of bank supervisors, I owe them an apology. However, the consolation is that, in my view, banking supervision is not an “all or nothing” game. While it is true that the kind of “cozy” or “light touch” supervision that was prevalent before the GFC is now out of the question, there is still a great deal of space in how we calibrate the “intensity” or “intrusiveness” of banking supervision in order for the process to be effective while not creating an undue burden on banks.