Unlicensed premises

It must be hard trying to start out in the world of banking. There are all of these massive competitors, hoovering up business, and there is no way to match their scale. Without scale, you cannot pay the same level of wages, you cannot offer the same breadth of services and you cannot reach as many customers.

What could be done? Well, regulators could think about taking banks licenses away for a start. That might create opportunities for new players to step into the breach and offer services that the bigger banks are prohibited from performing.

There is plenty precedent of precedent for banning firms. For example, Citi had its private banking operations shut down in Japan in 2004 for breaking the rules, and later had its retail bank sales function shut down for a month in 2009 because it hadn't updated customer screening technology for five years.

A ban on a bank’s activities keeps them sharp because the interconnected nature of banking means losing one business function can impact lots of others. Whereas a fine has NO impact.

Where is the evidence for this? Well, JP Morgan reached a US$13 billion settlement with the US government over bad mortgage deals recently and, as an excellent article in Fortune recently pointed out, the people in charge are still very much in charge. They must be kicking themselves about how bad that fine hurt them.

This week the European Commission announced the fines it was levying against firms participating in Japanese and European interest rate derivatives cartels, totalling €1.7 billion.

Fines again. What does a bank have to do to lose its license? If you can be found to deliberately be engaging in a cartel and you are still considered OK to run a business, when would you not be?

If a pub served drink to underage drinkers, it could have its license taken away. If a shop did not have adequate fire escape access, it could be shut down.

If either was found to be acting deliberately, there would be no doubt.

Will banks improve if they don’t face similar punishments? No. Will new, better behaved firms be able to break into the market if the firms found guilty of immoral behaviour are not removed from their positions? No.

So regulators, what is it to be? An orderly, competitive market, or business as usual?