It is well known that a major factor in the 2008 financial crisis was the reckless behavior of banks and senior banking officials, combined with “light” regulation, which led to banks continuing to operate beyond reasonable capital and liquidity limits.

The fundamentals of a prudent bank have been abandoned in search of greater market share, mergers, maximum profits and higher stock prices.

The need for a rigorous and properly enforced regime designed to enforce responsible banking practices is evident. Scotland should strengthen regulations governing the behavior of individual banking professionals in several ways:

  • Licence Banks wishing to do business in Scotland will need to obtain a banking license from the Scottish Central Bank. People working for banks at higher decision-making levels should also be required to hold a license to work in the banking industry. An individual’s banking license should be suspended or revoked if standards of professional conduct are not met.
  • Stewardship obligation of the shareholder. The shareholders of the bank must have a duty of responsible management and if they do not provide proper supervision, the revocation of the banking license will render their shares worthless, as would the alternative of nationalizing the bank.
  • Personal responsibility A system of financial penalties should be put in place to ensure that breaches of professional conduct lead to financial consequences. In principle, incentives should be aligned with standards of professional conduct. Compensation by banks for their own staff should no longer be allowed – if compensation is provided, it must be provided by an independent insurer.
  • Professional qualifications All staff above a certain level of seniority should be required to hold professional qualifications at a level commensurate with their level of seniority, responsibility and the size of the bank. These qualifications should include instilling principles of corporate governance of stakeholders that recognize the interests not only of shareholders but also of customers, borrowers, employees, as well as the responsibilities of banks to society as a whole.

One of the biggest responsibilities of a bank is to provide loans to support productive businesses so that all local and national economies have the capacity to produce everything people need to live well and in harmony with nature. .

While the responsibility for financing large infrastructure projects and large corporations may lie primarily with a national investment bank and a national pension and investment fund (or sovereign fund), private sector banks have the ability to provide loans to the SME sector of the economy to enable small businesses to develop and grow.

This is why an extensive network of small local banks in which lending decisions are made locally is important to support the development of local economies.

At present, the activities of commercial banks are not sufficient when it comes to lending to SMEs. Most bank loans are for mortgages. This must change. Home loan is important, but it should primarily be the preserve of a restored line of building societies.

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Incentivizing private banks to lend to businesses can be achieved through the creation of a framework for “credit guidance”. The following is a possible version of such a framework. The figures used are subject to discussion and are only offered here to show how a possible incentive structure works in principle. The incentives are created by a combination of different cap levels on the interest rates that a bank can charge and the level of loan guarantee provided by the central bank. The greater the importance of certain types of loans to the economy, the higher the authorized interest rate and the higher the level of loan collateral.

  • Level 1 (50% loan guarantee and interest rate ceiling on the bank base rate of 5%) consists in lending to companies in the most strategically important sectors of the economy, as they result from a strategy industrial. Mortgages from building societies also fall into this category.
  • Level 2 (30% guarantee and 4% ceiling) consists in lending innovative technologies and products to potentially significant companies.
  • Level 3 (10% guarantee and 3% cap) are bank loans and secured consumer loans (mainly loans for major consumer goods such as cars and important household items, especially high quality goods designed to be durable, easily repairable / reusable and recyclable).
  • Level 4 (0% guaranteed and 2% cap) are unsecured consumer loans. High levels of loan guarantees present a risk of “moral hazard” – the temptation to abandon the prudent principle of the bank in search of high profits while the risk of default is borne by the central bank.

One of the objectives of the regulatory framework for banker conduct described above is to discourage such conduct and uphold professional standards. Loan guarantees should only be provided on condition of strict adherence to professional standards of banking conduct, with severe penalties (up to and including imprisonment) for default.

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