Date: 2024-12-21 Page is: DBtxt003.php txt00025140
MONEY, BANKING AND FINANCE
SOME CORE MECHANICS OF MODERN BANKING
Rogue traders will always bank on getting away with it
Risk officers need to stay sharp to fight malpractice
SOME CORE MECHANICS OF MODERN BANKING
Rogue traders will always bank on getting away with it
Risk officers need to stay sharp to fight malpractice
Misbehaving traders’ tell-tale traits will vary depending on the misdeeds they commit © Jason Alden/Bloomberg
Original article: https://www.ft.com/content/2103efb6-b4f1-11e7-8007-554f9eaa90ba
Peter Burgess COMMENTARY
Banking as I experienced it as a young person growing up in the UK in the 1940s and 50s had a very different character from what became a new norm for the past 40+ years. My father was a teacher, but most of my many uncles, aunts and cousins worked in UK banking. Several were branch managers. All of this was well before the arrival of digital money, ATMs and banking plastic! All my extended family were very principled and professional and would have been intolerant of the rogue behavior that is the subject of this article. Back then I did not have a deep understanding of 'high finance', but financial management for most people was much more straightforward than it has become in recent decades. I have lived in the USA for more than 60 years but both the UK and the USA have many of the same issues with modern rogue trading!
Both Ronald Reagan and Margaret Thatcher embraced a policy philosophy that was based on the idea that 'competition' automatically ... indeed magically ... resulted in the best outcome. More competition does change the 'structure' of economic activity, but it is not always for the better ... and what is better, anyway? 'Reagonomics' and 'Thatcherism' were birthed in the 1980s in part in response to the economics malaise of the 1970s. There was economic malaise in both the UK and the USA during the 1970s but for very different reasons. In the UK, labor productivity had become very low compared to other developed economies and labour/management relations were a shambles. Prime Minister Thatcher earned the title 'The Iron Lady' when she addressed this issue which in many ways was a carry over from WWII exhaustion. Though the war was won ... Britain had been gutted and this legacy was never addressed. President Reagan had a different malaise. The USA had built a booming economy Post WWII but it was based on very low priced abundant energy, especially petroleum. When the OPEC (Organization of Petroleum Exporting Countries) cartel was formed in the early 1970s the global price of a barrel of oil soared from about $3.00 a barrel in 1970 to $13.00 a barrel in 1973 ... and then to around $30.00 a barrel by the end of the decade. The USA was the only highly industrialized economy in the world that did not impose high taxes on everything to do with energy and as a result had done little to improve energy efficiency in its economy. As a result when the OPEC cartel raised global prices for oil, almost all of the American economy became unprofitable. 'Gas guzzling' American automobiles were good in an economy where gas was retailing at 27 cents a gallon but not so good when the price went to $1.00 and then higher and higher and higher.
While the USA and the UK (and the Netherlands and Norway) were not part of the OPEC cartel, the big international oil companies that were based in these places did little or nothing to break the cartel for obvious reasons. OPEC was succeeding in raising the price for energy in a way that free competition could not. As long as almost infinately abundant energy was traded in a free market its price would stabilize at the cost of production ... but with the cartel in control of the quantity in the market then prices could be anything the cartel wanted. To the extent that the 'oil majors' got a lot of their oil from countries that were part of OPEC, they went along ... but in the process their business profits multiplied many times over!
Almost every industry and business sector in the USA experienced a profit crisis in the 1970s which translated into massive inflation for consumers. This was aggravated by monetary policy in the USA with interest rates rising to record levels ... more than 20% ... and then massive layoffs as high energy consumption industrial companies folded. A big part of high wage industrial jobs in the USA disappeared ... never to return.
Peter Burgess
Risk officers need to stay sharp to fight malpractice
Written by Laura Noonan
NOVEMBER 20 2017 (Accessed July 6th 2023)
From monitoring every word a banker types to banning mobile phones in dealing rooms and infiltrating trading books with false orders, banks have gone to great lengths in their bid to stamp out rogue trading, market manipulation and other employee misdeeds. Those overseeing projects know theirs is a battle that will not end with a victory lap.
“You can never eliminate the possibility of people doing bad things and banking tends to attract the type of people that are inclined to push the boundaries — people who are greedy and stupid around money,” says one long-time compliance executive.
Most banks are so afraid of tempting fate by talking about their beefed-up compliance processes that they refuse to discuss their strategies. Still, compliance is a battle that banks must fight because regulators are breathing down their necks and past breaches have carried such a heavy cost.
Investment banks have paid billions in penalties for manipulating interest rates, retail banks in the UK have been hit with even bigger penalties for mis-selling scandals, and individual banks including Société Générale, JPMorgan and UBS have lost billions at the hands of rogue traders.
Against that backdrop, it is little surprise that consultants at PwC say banks are undertaking “huge programmes” of operational work to minimise the risk from rogue trading and other misdeeds.
PwC’s Ruk Permal and Graham Ure say steps include prohibiting traders from trading outside the office, embedding compliance staff on trading floors, simplifying trading platforms so it is harder to obscure risks taken, and banning mobile devices from trading floors.
Bank insiders say they are selectively using other tactics, too. These include putting false trades into the system to see if they will be caught, and monitoring the behaviour of compliance people to make sure they are not colluding with traders or making improper use of the sensitive information they see.
Then there is controlling the flow of people into banks. This can be by using behavioural testing and other kinds of enhanced vetting to weed out potential problem hires, and monitoring the comings and goings and other behaviour of staff more closely once they are in situ.
Jeremy Arnold, Nomura’s chief risk officer for Europe, the Middle East and Africa, says: “There is no single strategy that will prevent poor conduct.”
Mr Arnold advocates a “combination of education, strong and clear pre-trade controls, robust policing and low tolerance to any conduct-related issues”. Such strategies sound sensible but they are not without risk and cost.
Increased surveillance is expensive and can hurt morale. Peter Rossiter, chief risk officer at UK challenger bank Starling, says it is necessary to balance “the cultural need to trust and empower employees to do their job responsibly, versus creating a fear or distrustful culture from heavy-handed preventive controls”.
There is also a danger that banks can become overconfident in their new tools and neglect the basics.
“The smart use of technology has a key role to play,” says a second chief risk officer. “However, good old-fashioned common sense plays an important role.”
“It was well known that the margin in PPI [payment protection insurance that UK retail banks widely mis-sold] was the only way certain retail banking service lines made money,” the risk chief adds. “That was a total failure of management, but also by regulators that permitted those practices and only later changed the rules.”
Another risk executive says banks can sometimes “get a bit too sophisticated in some of the things we look at when the indicators [of fraud and rogue trading] are in plain sight”. He notes that a sharp improvement in the profit a trader is producing can be “a really good clue”.
The risk executive adds that misbehaving traders’ tell-tale traits will vary depending on the misdeeds they commit. When people conceal trades then “leaving the office late or coming in early is a pretty obvious trait”, he says. “They need to do more; they need a bit of privacy.”
On the other hand, you can only rig rates like Libor when markets are open, so “if you’re manipulating a market, standard working hours are fine”.
When it comes to hiring, traits of a potential fraudster will not necessarily show up by vetting an individual’s social media accounts or putting them through behavioural tests.
“The simplest and most frequent — and most depressing [sign] — is that people are liars,” says the first compliance executive.
“People have lied on their CV quite often about something quite minor,” the executive adds. “People rationalise it by saying it was only a lie about something small and they forget the critical lesson that . . . if someone lies and gets away with it, then before they even go through your compliance training they’ve been taught that they can lie and get away with it.”
Once they are employed, experts say bad behaviour typically manifests itself quickly, and it is almost unheard of for someone to go from being a good trader to a rogue one mid-career.
All of the risk officers press the case for zero tolerance for dishonesty or cover up. One investment bank docked bonuses for anyone who had assistants carry out fire training on their behalf. Several compliance executives told the Financial Times that they would see such an action as a sackable offence as it showed dishonesty and that was unacceptable.
“Mistakes happen,” says Mr Rossiter. “They should be identified and corrected. The failure to do so is an error of principle and should not be tolerated.”
“Without the right culture you will always be fighting a losing battle,” says the second chief risk officer.
“To be clear and unambiguous about what is acceptable or unacceptable behaviour is essential — and to establish a reward system that syncs to that.”
Please use the sharing tools found via the share button at the top or side of articles. Copying articles to share with others is a breach of FT.com T&Cs and Copyright Policy. Email licensing@ft.com to buy additional rights. Subscribers may share up to 10 or 20 articles per month using the gift article service. More information can be found at https://www.ft.com/tour. https://www.ft.com/content/2103efb6-b4f1-11e7-8007-554f9eaa90ba