Higher capital not fines, says RBS Americas head of op risk

Regulators should start thinking about alternatives to fines, such as punishing banks with higher capital requirements in order to help remedy problems, says Craig Spielmann, head of operational risk for the Americas at RBS in New York.

The financial crisis has seen a move away from Basel II principles regarding capital, and this may be to the detriment of the industry, Spielmann warns. “Basel II was a great work of art designed to drive operational risk focus and strengthen the financial system,” he says. “But I’m concerned that we have moved away from those principles based on the problems stemming from the financial crisis. I believe now may be the time to start thinking about driving safe and sound behaviour through better and more flexible capital levers – where appropriate – versus punitive fines.”

He says this would be a better way of encouraging banks to correct some of the problems that the regulators are finding. “My personal feeling is that having banks hold more capital would be a more effective penalty because they would be more incentivised to fix the problems to get capital relief.”

He adds: “Personally, I am concerned that this approach is not part of the current dialogue that created operational risk as a value-add to the businesses and clients. The current focus seems to be more on penalties, which may hurt the operational risk value proposition.”

Use of capital incentives would not only be more in line with the Basel principles, it would also make more sense for the wider economy, Spielmann says, as it would keep money in the banking system, thus stimulating the economy. He adds that by having more capital, banks can lend to more people, which may be of more benefit to struggling economies than other more punitive measures.

“This way you are not taking money out of the banks in a way that basically hampers economic growth and you have a stronger bank at the end of the day. Plus if the banks have more capital, they can confidently lend to more people. At the moment the man on the street is worried about his job and we need to think about driving growth in a safe and sound way. All these economies are suffering and strong banks are the key to drive growth and innovation by injecting capital into the economy where it makes sense.”

Fines still have their place – but should be reserved for persistent offenders, he says.

“If a bank is systemically falling foul of the rules, then the punitive penalties are certainly an appropriate measure. But as we look at capital, as we look at incentivising people to fix problems, what is the best method of doing that?”

The full profile interview with Spielmann will be published in June’s Operational Risk & Regulation.


This article was first published on Risk

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