Self Regulation Fails the Public. And It Even Fails Bankers.

Photographer: Paul Thomas/Bloomberg

Robert "Bob" Diamond, former CEO of Barclays Plc. He resigned after regulators fined the bank 290 million pounds.

Imagine that when you went to the airport the security screener worked for the airlines. If you were a frequent flyer, you could go through a faster lane. If the staff knew you they might just wave you through. And if you knew someone at the airline, you could get an occasional exception to the rules.

The airport analogy is not very far away from the actual situation in the banking business. The major multinational banks are to a large extent responsible for monitoring their own adherence to the rules. As stories today underline, that’s not working so well.

Exhibit One here is the $1.92 billion in penalties that HSBC has agreed to pay to settle a U.S. criminal money laundering probe. The deal comes as part of a deferred prosecution agreement, and follows an extensive Senate report on HSBC’s failings. HSBC’s own compliance executives pointed to a culture of “rubber stamping ” at the bank’s Mexican subsidiary, calling the affiliate’s willingness to bend rules the “School of Low Expectations Banking.”

Meanwhile three traders, one who had worked at Citigroup Inc. and two from the brokerage RP Martin Holdings Ltd, were arrested in the U.K. in the Serious Fraud Office’s investigation of Libor manipulation. Barclays Plc and UBS AG have each already paid fines of more than $450 million in Libor-rigging cases. Libor-setting was (and, amazingly, still is) an almost too-perfect example of bank self-regulation, conducted largely on the basis of an honor system in which banks were supposed to report the rates they paid to borrow.

Within every industry there’s some level of self-regulation; government can’t directly monitor everything. In banking it’s clear we’re headed to more direct oversight. One reason for this is that the system we’ve had hasn’t just been unfair to the public.

It may even be unfair to the bankers. The too-close relationship between traders and other officials in the bank — “Always happy to help, leave it with me, Sir” — encourages bankers on different sides of the compliance divide to think that they’re all just helping each other get their jobs done. Until someone wakes up and notices that they’re breaking the law.

A version of this post appeared earlier in the Market Now newsletter. Click here to register at and subscribe to The Market Now daily email.

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