Knight rides out to defend stricken banks

Published on Tuesday 8 September 2009 22:10

AS A former minister in John Major's Cabinet, Angela Knight is no stranger to the intensity of debate and the criticisms of public office. The one-time economics secretary served in the dying days of the last Conservative government that suffered the fall-out over Europe and the squabbling over the party's leadership. When it became clear that a change of government was coming, Knight knew she would have to seek an alternative career path.

A berth at the British Bankers' Association might normally be seen as a relatively sedate role compared with the rough and tumble of the Westminster village. But instead, Knight's stewardship of the banking sector has coincided with the biggest and most serious crisis ever to face the industry and it has pushed Knight to the forefront of the debate – often being called upon to defend a sector that she freely admits to having failed itself.

Reflecting on the contrast between this summer and the previous two, the BBA chief executive affords a little gallows humour. "We had some less stressful August holidays this time round," she says.

"This summer there has not been anything like the same intensity. The wholesale markets were appalling a year ago, now they are acting reasonably."

The queues outside Northern Rock branches in 2007 – signalling the first failure of a major British high street bank since Victorian times – remain fresh in the memory. They marked the starting point for a catastrophic series of events culminating in JP Morgan taking over the failed Bear Stearns and the US government effectively nationalising major mortgage providers Fannie Mae and Freddie Mac.

But worse was to come. The US regulators allowed investment banking giant Lehman Brothers to go to the wall, which many experts believe turned the failure of one banking activity – subprime lending – into a systemic threat to the world's financial infrastructure. Royal Bank of Scotland and HBOS came within hours of not being able to open to new business.

Knight says that since then Britain's banks have seen their balance sheets rigorously stress-tested by the regulator, the Financial Services Authority, and can concentrate on "how to exit ourselves from taxpayer involvement in some banks rather than worrying what's going to happen next". But there is no cause for complacency in the industry, she says.

She is well aware of the continuing "highly emotive" debate on senior bankers' bonuses in the wake of the implosion that plunged the world into recession. She also accepts that it was important that the leading architects who helped bring banks to their knees fell on the swords – Sir Fred Goodwin was ousted as chief executive of RBS, while previous banking wnderkind Andy Hornby was jettisoned as part of Lloyds TSB's takeover of HBOS. "People may not get the (banking] fundamentals, but they are not daft, they get the fundamental points," she says. "Why should X or Y remain at the helm of a bank that they have got into difficulties?"

She accepts that the public need to know that the sector is putting its house in order but that people should remember most banks are not in financial trouble and do not have taxpayer support.

But what lessons have been learned? Many, according to Knight – not least that the Basle rules governing international banks' capital requirements were shown to be inadequate. It was also found to be no longer tenable for banks to believe they did not need to hold so much capital in the good years. "It's proven conclusively that this did not work," Knight says.

She admits that the banking sector, on the back of a decade of growth, had come to believe that while individual organisations might experience difficulties it was unthinkable that the whole world financial system could nearly come to a halt. But she says baldly: "It did."

Many critics have lambasted banks for moving into areas they did not understand through a mixture of greed and incompetence, spawning a plethora of dangerous, complex products such as structured investment vehicles and collateralised debt obligations.

Knight says now: "We have learnt that you cannot offset risk by bundling up loans and selling them on. It did not shift the risk, but made it more opaque."

There were other casualties from the crisis, she says, noting that the sector no longer relies on the credit ratings agencies as it once did.

The solutions to what happened are yet to work themselves out and are still being argued over. But the call for investment banking to be split from retail banking gets little support from the BBA.

Acknowledging the exception of RBS, Knight says the industry believes the experience of the past two years has shown that broader-based banks are better placed to survive than narrower operations. As such, the BBA does not back any return of a regime for the UK based along the lines of the US Glass-Steagall Act which, after the 1929 Wall Street crash, created such a separation. Bill Clinton repealed the act and some have called for it to be re-introduced, but Knight jokes that "going back to the future only works in films".

As for the bonus row – Knight has heard all the arguments before. She has also had her share of abusive e-mails for defending the industry on the issue and shakes her head knowingly.

"You can never rationalise about what a footballer, chat show host, banker, doctor or nurse earns. It is always an emotive subject," she says. She feels the FSA's code on remuneration last month is a good start and the BBA has few objections to what the G20 finance ministers seemed to be outlining last weekend. The industry appears to be edging towards an international regime whereby individual bonuses are not capped, but the overall amount set aside for bonuses might bear some greater regulation.

But Knight does take issue with the Financial Services Authority, the City watchdog, on the clawback of bonuses from bankers where problems from the activities that generated the bonuses arise some years later.

"At present I don't see how clawback can operate practically if a deal goes wrong later on," she says. "The banker involved may no longer work for you … It would be better to get the bonus system right at the start." She knows this stance may not win her many friends, but she wants to emphasise that banking should not be equated wholly with self-serving high-flyers out to squeeze as much as they can out of the system.

However, keeping the bankers in check remains a highly charged political issue. With the public still baying for blood, the politicians know that points can be scored at the expense of the banking sector.

"We get nowhere just bad-mouthing each other," says Knight. However, she admits banks brought the Whitehall and media feeding frenzy on themselves: "You can't park it all at the politicians' door."

The acknowledgement that the banks are in a weak position to argue their case may explain why the BBA is relaxed about shadow chancellor George Osborne's plan to return supervision of the banks to the Bank of England from the FSA if the Conservatives win the next election.

Knight says that the question of how well the supervision is undertaken is more important than who does it: "The important thing is that whoever ends up with banking supervision has the power and the people to carry out the job effectively.

"What we need is a steady hand on the tiller, someone capable of taking the lead in a crisis and a clear chain of command so that, if things go wrong, everyone knows who does what and events can be contained."

'There has been a hit to morale'

SIMON Thompson, chief executive of the Chartered Institute of Bankers in Scotland, says staff employed in the banks have been angered by the furore around the high-flyers in the sector.

"Ordinary retail and business banking has gone on with very high levels of professionalism during the crisis," he said. "That is amazing when you think about what they have been hit with, such as falling bank share prices, job losses and pension changes.

"But there has been real anger at the position they have found themselves in. There has been a hit to morale. Some of the people who have been in their jobs 20 years and more have seen their pride hurt." However, Thompson, pictured, said he did not think the Scottish banking industry as a whole would suffer long-term image damage because of what has happened at RBS and HBOS.

"I don't think there's been any sign that long-term damage has been done to the overall Scottish financial services brand.

"People in other countries are more concerned with what is happening in their own banking sectors, be it Germany, Holland etc, than what is going on in Britain."