Peter Hughes is quoted in an FT / Global Risk Regulator report on the UK’s ring-fencing legislation that is designed to make banks’ retail operations safer by organisationally isolating them from their riskier investment banking units.
A recent FT / Global Risk Regulator report ‘Concern around pension schemes as UK banks race to meet ring-fencing deadlines’ assessed the banks’ readiness to implement the UK government’s ring-fencing legislation by the January 2019 deadline. The legislation aims to make the UK banking system safer by organizationally isolating banks’ retail operations from their riskier investment banking units.
The report’s author, Farah Khalique, via the Durham University Business School invited Peter to provide his insights. In her report she wrote:
“Some believe that the introduction of legislation like ring-fencing has the unintended effect of making banks less safe. Peter Hughes is a visiting fellow and advisory board member of the Durham University Business School’s Centre for Banking, Institutions and Development, where he leads research into next-generation risk management and accounting systems. A former banker himself, he spent 27 years at JPMorgan where he held positions including global head of risk management – shared technology and operations. He is sceptical of ring-fencing rules.
“Perversely, the ability of banks to address their risk reporting and control shortcomings is inhibited by the substantial energy and resources they are required to devote to the implementation of costly and complex legislation and regulation that address symptoms rather than causes,” he says. “We are hopeful that our research will ultimately assist banks in redressing this balance and allow them to progressively reassert their competence and authority over the evolving risk agenda for the benefit of all their stakeholders.”
The FT / Global Risk Regulator report highlights the significant costs incurred by banks to achieve compliance with the ring-fencing legislation. For example, Barclays has reportedly spent almost £1bn on compliance over the past three years. The thrust of Peter’s above comment is to argue that these resources could have been used to greater effect if they were applied in addressing the banking sector’s current inability to effectively identify, quantify, aggregate and report their exposures to risk. Instead, resources are being diverted into costly and highly disruptive post-crisis governmental interventions, such as ring fencing, to compensate for the banking sector’s weak risk control and reporting systems.