Capital punishment for bankers? Expectations and realities Restoring trust in the financial industry, ICMA Asset Management and Investors Council Meeting & Seminar, Zurich, 8 April 2014 Daniel Zuberbühler
Ov Over erview iew 1. Introduction 2 . Personal sanctions against top bankers 2.1. Switzerland: Report of Parliamentary Oversight Commission on UBS-crisis 2.2 UK Parliamentary Commission on Banking Standards 2.3 Germany: § 54a: Criminal provision in Banking Law 3. Sanctions against banks as enterprises 3.1 Criminal liability of banks 3.2 Monetary sanctions arms race against large financial institutions 4. Prudential alternatives to personal or monetary sanctions 4.1 Much more common equity / capital punishment 4.2 Organisational simplification / reduction of complexity Daniel Zuberbühler 1
1. 1. Int ntroduct oduction ion Disclaimer: no death penalty for bankers • Fall-back into dark middle ages • Own goal for supervisors: search for culprits will extend to them • Financial crisis: nobody looks good ! restraint in judgement Call for sanctions understandable after mega-crisis • Hold culprits accountable ! enhance responsibility of successors • Bankers are ideal targets, because overpaid and discredited • „Paid too much for doing the wrong things“ • General loss of trust in banks as consequence of crisis • But hypocritical reproach of criminal behaviour in Switzerland for business-model with foreign tax evaders Daniel Zuberbühler 2
2. 2. Per ersonal onal sanct anctions ions agains gainst top op bank banker ers „Voluntary“ resignations of top managers & board members after mega-losses or even state bail-out • Market pressure (shareholders / customer reactions) • Call for resignation by media and politicians • Hint from supervisory authority , without formal enforcement • Take-over by other bank Only lower employees formally dismissed or criminally prosecuted ! unsatisfactory and unjust Politicians try to hold top bankers accountable for past or at least future failures Daniel Zuberbühler 4
2.1 2.1 Swit itzer erland: land: GP GPK-R K-Repor eport on on UB UBS, , 30.5.10 30.5.10 Parliamentary oversight on Government and Administration: only behaviour of federal authorities examined • Motions and recommendations primarily addressed to authorities • FINMA: what did UBS top management know about QIA-violations ? • Industry ban (FINMAG 33) for departed execs.: no retro-activity Recommendation 19: „GPK holds UBS accountable“ • Independent expert group should examine bank-internal handling by BoD, GEB and audit firm, in particular • Opportunity of criminal procedures / civil-law actions • Relief from liability for crisis years by General Assembly • Severance payments for upper and middle management • Transparency on dispensation with criminal & civil-law actions against former UBS-Management ! UBS transparency report of 14.10.10 Daniel Zuberbühler 6
Exper xpert opinion opinion by by Tobias obias Straumann aumann: : The he UB UBS Cris isis is in in His Histor orical ical Per erspect pectiv ive, e, 28.9.2010 28.9.2010 UBS top managers were no gamblers, but in their self-perception (and external assessments) risk-avers and rather conservatively prudent , but without sense for hidden risks, sound distrust, independent judgement, strong leadership In historic comparison UBS did not commit unusual mistakes • Subprime : Whenever financial bubbles rise, many market participants are tempted into ignoring time-honoured banking rules • US x-border WM: To be expected that Swiss banks would experience difficulties to adapt their traditional wealth management to a dramatically tightened regulatory environment. UBS acted only with particular carelessness , but not fundamentally differently than the other banks Fundamental question : Future positioning of UBS & CS? Binary choice between internationally oriented business model or retreat into the “ Reduit” / Illusion: optimised regulation & supervision Daniel Zuberbühler 7
Tougher ougher sanct anctions ions for or mana manager gers of of banks banks wit ith h for ormal mal or or fact actual, ual, implicit implicit state e guar guarant anty? Cantonal bank executives: no personal moral hazard • Tax payers react particularly sensitively & resentfully • Against life experience that managers & politicians would consciously expose themselves to such a purgatory Large bank executives do not want a state bail-out • Ideological horror to be nationalised and subject to state interference with business orientation & salaries ! death penalty • Social contempt dissuasive Wrong incentive from expectation of customers, counter- parties, shareholders in state safety net ! low risk premium • Running systemic risks with minimal capital ! Root treatment : more capital, resolvability, loss sharing of shareholders and creditors (bail-in) Daniel Zuberbühler 8
2.2 2.2 UK UK Par arliament liamentar ary Commis ommission ion on on Banking anking Standar andards ds: : Changing hanging banking banking for or good, good, 19.6.2013 19.6.2013 Recommendations adopted by UK Gov. & Parliament: • Financial Services (Banking Reform) Act of 18.12.2013 Measures to enhance personal responsibility & sanctions • Finding : Too many bankers, especially at most senior levels, operated in environment with insufficient personal responsibility • Claiming ignorance • Hiding behind collective decision-making in complex organisations • Corporate Governance as Potemkin villages : appearance of effective control and oversight without the reality • Objective: making individual responsibility a reality Daniel Zuberbühler 9
UK: UK: Senior enior Per ersons ons regime gime for or top op bank banker ers All key responsibilities assigned to a specific, senior individual • Senior Persons : BoD, GEB and some other key functions • Detailed job description • Handover certificate when relinquishing position: outline how responsibilities were exercised and highlight critical issues for successor • Responsibility remains with designated individual , even when delegated or subject to collective decision-making • Burden of proof reversed for supervisory sanctions: • After successful enforcement against bank: Senior Persons must demonstrate, that they took all reasonable steps to prevent / mitigate failing • Reckless misconduct : entire remuneration recoverable Doubts about fairness of formalised responsibility / bureaucracy Daniel Zuberbühler 10
Sca cape pegoa goat idea idea reject ejected ed by by EBK K bef befor ore e cr cris isis is Designate a senior for compliance • Resignation in case of violation " Sacrifice financially cushioned " After every accident new sacrificial lamb on ejector seat # Unsustainable & unfair Daniel Zuberbühler 11
UK: UK: Licens Licensing ing regime gime for or ot other her bank bank emplo employees ees wit ith h pot potent ential ial for or ser erious ious har harm m Objective: facilitate enforcement also against lower sinners • Licensed Persons : bankers, whose behaviour could seriously harm the bank, its reputation or its customers • Contractual obligation to set of Banking Standards Rules • Bank responsible for instruction and disciplinary actions • No prior examination / approval by supervisors ! Bank responsible alone Single public register for Senior & Licensed Persons • Swiss FIDLEG-project : professional skills examinations & duty to register for all client advisors in financial sector ! bureaucracy Daniel Zuberbühler 12
UK: UK: Criminal iminal of offence ence of of „r „rec eckles kless mis misconduct conduct“ “ in in the he mana management gement of of a a bank bank Prison sentence of up to 7 years for reckless misconduct of Senior Persons • If the bank „ failed “ due to their actions or omissions • Insolvency, substantial costs to taxpayers, lasting consequences for financial system or serious harm to customers • If their behaviour was far below the standard , which could reasonably be expected in their position • Aware of risk that their behaviour could lead to failure of bank Only for most serious of failings and primarily in large banks • In smaller banks proving responsibility is easier and harm is much lower Daniel Zuberbühler 13
UK: UK: Remuner emuneration ion for or Senior enior & Licens Licensed ed Per ersons ons: : Incent ncentiv ives es for or bet better er beha behaviour iour Remuneration Code: longer run balance of risks / rewards $ • Deferred compensation : much higher proportion and for much longer periods of up to 10 years • Favour long-term performance and soundness of firm ! bail-in bonds / CoCos • No reliance on narrow measures for profitability : ! RoE • Cancellation of deferred remuneration in light of individual or wider misconduct or downturn in performance of bank or business area • Direct taxpayer support : cancellation of deferred remuneration, unvested pension rights and severance payments • ≈ Lex UBS (Art. 10a BankL): Prohibition of variable compensation / adaptation of remuneration system ! contractual provision Daniel Zuberbühler 14
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