Bank Reform



Recent History

The Preface to the first edition of Lingard’s Bank Security Documents published in March 1985 contains the following:-


‘Unfortunately, the evolution of security documents is under pressure as banks from overseas – – – flood into London. Such banks often lend at highly competitive rates to strong customers. The result has been to increase the competitive pressures on banks to a point where they are sometimes denied the detailed financial information needed to make a proper assessment of the prospects of a company.’


The pressures increased and were compounded by credit default swaps under which gullible banks participated in bad loans in return for fees which enhanced the bonuses of the ‘bankers’ responsible. Grossly inadequate provisions for the bad debts were made in the audited accounts and regulatory returns.


The Preface to the fourth edition published in August 2006 – before the crash – again warned of “the distinct possibility of forthcoming troubled economic times”. Senior bankers gave priority to selling the bank’s products in a highly competitive market and failed to invest adequate resources in risk assessment. Only now is interest being shown by banks in risk assessing software available from major actuaries such as Towers Watson.


The fifth edition as at 31st August 2011 has now been published to assist bankers and their advisers to structure sound security and sound lending and insolvency practitioners to identify defective security.


Essential Reforms

The regulatory failures of the recent past have now been admitted and the Bank of England will again take charge. However, competitive pressures remain and the policy of the EEC and British Government is to increase competition by splitting some of the larger banks. Arguably, there is already too much competition between banks.


The nub of the reforms now required is surely (a) the protection of depositors and (b) promotion of the UK economy by ensuring that retail deposits are used to finance UK businesses and house purchases. It is unacceptable that deposits protected under the deposit protection scheme are used to fund investment banking speculations, credit default swaps and such like. These may be profitable but are akin to gambling with other people’s money. But how can the regulators police credit default swaps and other derivatives?


Cash rich banks have and will inevitably attract predators. Present proposals envisage banks being controlled by supermarkets, grocers and other commercial entities. In the past, British banks have frequently been taken over by banks regulated in cultures which encourage and reward massive risk-taking of a type which caused the present crisis.


The solution surely is to restrict deposit taking in the UK to banks and building societies both controlled and managed by ‘fit and proper’ retail bankers who comply with defined criteria.

1. A cap could be placed on the maximum amount allowed to be lent by any deposit taking banking group to any borrower group, country or sector.

2. A specified percentage of deposits could be restricted to be used solely for lending to stable UK businesses and for prudential house purchases.

3. Such activities would no longer require highly paid risk takers and a cap could be placed on the remuneration of bankers who manage deposit takers.

4. The Bank of England could have a golden share to prevent opportunistic takeovers – in return for the deposit protection scheme.


The above restrictions would not apply to banks which do not take deposits covered by the deposit protection scheme. The present High Street banks could hive down and decouple their deposit taking branches, distributing shares in the new entities to their then existing shareholders. Such shares would ideally be listed on the Stock Exchange.


Present Dangers

A systemic weakness in the present position is exemplified by the following extract from Bankers to Bankruptcy by James Lingard now available on Kindle:


A Banker’s Confession


‘One of my team, who had been set the task of checking our holdings of bonds against the latest risk assessment software, identified three holdings which we should never have touched. I cannot really blame my colleagues who made the investments. They were simply following the rest of the market and relied on the rating agencies who had considered the bonds to be triple AAA. The auditors gave no warning of any problem and the regulators seemed to be perfectly content.

‘The potential losses were so large that they exceeded the capital and reserves of the bank. We had become technically insolvent.

‘I immediately went into emergency mode and organised teams of our investment bankers to create parcels mixing the junk bonds with higher grade bonds which I knew to be attractive to the market. With a bit of luck, our sales people would succeed in passing them on to those of our competitors who had failed to invest in the new software.

‘I instructed the sales teams to ensure that nothing was said or done to mislead the victims on whom the junk was about to be unloaded. “Simply tell them what is available, that we are overexposed and a policy decision has been taken to diversify the risk.” Perhaps, the bonds would not default – who could tell. Remember, we could be wrong. None of them have actually defaulted yet.

‘In just three weeks, hard working investment bankers succeeded in unloading all the suspect bonds. OK, we made a loss on those holdings but nothing like the disaster which could have hit us. Those sales guys saved the bank – no question about that. I intend to pay all my people concerned decent bonuses. They’ve earned it. I don’t care what the politicians say.’ The Banker chuckled at the thought. ‘I went to see the regulators this morning and warned about bonds circulating in the market at a gross overvalue.’

But, can it be right to allow banks to operate in the market on a ‘dog eats dog’ basis? Do we really want a free market economy? And did the guys who ‘saved the bank’ deserve million pound bonuses?

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