Banking: it’ll make you go blind, you know?

By VoteRedGoGreen

The beeb is reporting that Mervyn King and Alistair Darling are clashing over what needs to be done on banking reform. The Governor’s view is that there needs to be more done to allow intervention in banks that are “seen to be behaving riskily”; The Chancellor, on the other hand, favours leaving the tripartite system as is.

So far so predictable. I have some sympathy for King’s view, in honesty: but the important question is, how do you tell when banks are behaving riskily?

So here’s my two penn’orth for banking reform: Nationalise banking audit.

At present, banks (like other large businesses and financial institutions) must have their accounts audited, and spend large sums of money on getting the large auditors like PwC, Accenture and KPMG to come in, sift through everyone’s desk, and sign off on the accounts.

However, there have clearly been problems. There’s not a suggestion that any of the banks or mortgage lenders that have run into difficulties in the last two years came close to failing an audit; surely that’s a damning indictment of the present audit system?

There’s clearly a peverse incentive operating here. If a bank is paying an auditor hundreds of thousands of pounds to perform a service, there’s little incentive for the auditor to give their client bad news.

They are, after all, keen to get the contract again next year. In fact, the sort of personal relationships that can build up at a management level between banks and auditors that work with one another for a long period of time could work to make this worse.

That’s why, I think, the state should get involved. I think that a new consensus emerging from the financial crisis is that the public interest stake in the stability of the banking sector should be acknowledged more, and that there is a legitimate role for the state.

So, once the state relinquishes the stakes it has bought in the banks which required bailing out, we need to look at how that role is to be maintained.

Having a nationalised Office of Banking Audit – financed by an Audit Tax on banks, which would more or less replace the fees banks currently pay to their private auditors – would ensure that a stringent watch could be taken on risk taking, and that banking balance sheets can be kept in check.

Nationalising bank audit is a neat “third way”, if you like, between returning to the light and limited touch of the past, and all-out state intervention in banking through ownership of stakes in large banks.

Can it happen? I’m not sure the government is feeling bold enough. But it should do. The time for being squeamish about nationalisation is past: I think we’re all past the days when it meant going for the “commanding heights” of the economy.