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Saracen's Fez
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B1019 – Banking Bill 2016, TSR Labour Party
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Banking Bill 2016
An Act to ensure banks of a size such as to pose a systemic risk manage risk responsibly

BE IT ENACTED by the Queen’s most Excellent Majesty, by and with the advice and consent of the Commons, in this present Parliament assembled, and by the authority of the same, as follows:—

1: Definitions

The following definitions are used in this Act:
(1) 'Inflation' is the year-on-year change in the Retail Price Index.
(2) A 'remunerated position' is a contract for labour, in consideration of which an individual is compensated, whether by money, stock, stock options, property (real or personal), or otherwise.
(3) Stock holdings in an index are 'diversified' when they are the same or similar to that which would be held by an index tracker fund.
(4) 'Risk' refers to the probability of loss of any given portion of capital, especially larger portions.
(5) The 'liquidity' of a market refers to the ability of applicable banks to dispose of the entirety of their holdings of a particular asset or asset class at the current market price.
(6) 'Cyclical concerns' are those which refer to current macroeconomic performance.
(7) A company's 'overall debt:equity ratio' is the ratio of total liabilities of a company to its total market capitalisation.
(8) 'Applicable banks' are public companies with global annual revenue in excess of one hundred million US dollars derived from investment and the provision of financial services, both for consumers and for institutions.
(9) A 'derivative instrument' is a contract, the benefit and burden of which are expressly transferable, which is not for the immediate transfer of existing property, but rather, refers either to an obligation to buy, sell, or pay moneys based on the value of any asset at a future date.
(10) 'Social benefits' include, but are not limited to, market efficiency, optimal allocation of assets, the instigation of research or other forms of social development, and anything which increases the total value or quality of consumer consumption.
(11) 'Affirmative asset partitioning' is the element of limited liability which protects holders of equity in a limited liability company from debt-holders in that company making claims against their personal assets.
(12) 'Defensive asset partitioning' is the element of limited liability which protects the assets of a limited liability company from claims made by creditors of a shareholder in that company.

2: Independent Banking Risk Assessment Board

(1) An organisation, named the Independent Banking Risk Assessment Board shall be established.
(2) The Board shall be managed by five respected risk analysts, at first appointed by the Secretary of State for Business, Innovation and Skills; thereafter appointed by existing Board managers.
a) These managers shall be remunerated at a flat rate of two million pounds per annum each.
b) An additional staffing budget, amounting to ten million pounds per annum, shall be provided to the managers.
c) The remuneration and staffing budget shall be adjusted according to inflation.
d) Managers may not hold, or accept for the future any other remunerated position while in their positions, and any asset holdings shall be subject to quarterly examination to ensure a lack of conflict of interests.
(3) Managers of the Board may only be removed upon the expiry of a ten-year term; their resignation; or a finding of gross misconduct.

3: Leveraging

(1) The Board will assess the risk levels of holdings of applicable banks relative to diversified stock holdings in FTSE 100 companies ("Baseline Holdings".
(2) Those Baseline Holdings will be assigned a Risk Adjustment Rate of 1, and all other holdings should be assigned a Risk Adjustment Rate commensurate with their risk level relative to Baseline Holdings (for instance, holdings four times riskier than Baseline Holdings shall have a Risk Adjustment Rate of 4, and holdings one-quarter as risky as Baseline Holdings shall have a Risk Adjustment Rate of 0.25).
a) Relevant factors to the calculation of a Risk Adjustment Rate shall include the liquidity of the relevant market, the extent of the market controlled by a single body, volatility over any given period of time, the relationship between that asset or asset class and the rest of a bank's holdings, and any other considerations the Board feels to be relevant apart from cyclical concerns.
(3) Companies shall be required to release any and all internal documents not relating exclusively to future strategy to the Board – any refusal to disclose, or incomplete disclosure, deliberate or not, shall incur a flat penalty of 10% of annual gross revenue.
a) It shall be a criminal offence for any manager or employee of the Board to knowingly release, or financially act upon information received by way of their role.
b) The maximum penalty for this offence shall be five years in prison.
c) It shall be a civil tort to release any of the same information.
(4) All holdings shall have an adjusted debt:equity ratio of the company's overall debt:equity ratio multiplied by their Risk Adjustment Rate.
(5) A company's mean adjusted debt:equity ratio shall be calculated by finding the sum of the values found by multiplying the adjusted debt:equity ratio of a particular asset (or, where all assets within an asset class have the same adjusted debt:equity ratio, that asset class) by the proportion of a company's entire holdings that said asset or asset class constitutes.
a) Where a liquid market for a particular asset does not exist, its value shall be assumed to be the price at which it was most recently bought and sold, either publicly, or by the company in question.
(6) The maximum mean adjusted debt:equity ratio applicable banks shall be entitled to maintain shall be two.

4: Creation of Derivative Instruments

(1) Applicable banks, before issuing or trading a new derivative instrument, must first submit details of said instrument to the Board for approval.
(2) The Board should approve any instrument which creates social benefits which outweigh any additional risk it places on the financial system.
(3) The Board must issue reasons whenever it decides not to approve an instrument.
(4) A decision not to approve an instrument shall be amenable to judicial review at the behest of the submitting bank.

5: Limited Liability

(1) Shareholders who wilfully cause an applicable bank to adopt a strategy, under which downsides are to a significant degree externalised due to the size of potential downsides substantially exceeding the net value of the bank's equity shall forfeit their right to the affirmative asset partitioning element of limited liability towards bondholders and other creditors.
(2) This section shall not affect the liability of other shareholders in the bank concerned.
(3) This section shall not affect any defensive asset partitioning.
(4) Any additional compensation due to bondholders and other creditors due to this section shall be incurred as joint and several liability by the shareholders concerned in equal shares, irrespective of the proportions of their interests in the bank in question.
(5) Where the net assets of the shareholders concerned are not sufficient to fully compensate all remaining creditors, they shall be compensated as though the assets of the shareholders formed part of the assets of the bank upon insolvency.

6: Commencement, Short Title and Extent

(1) This Bill may be cited as the Banking Act 2016;
(2) This Bill shall extend to the United Kingdom; and
(3) Shall come into force on the 1st January 2020.

Notes
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Section 2 establishes an independent board to carry out the requirements of this Bill, and incurs the only direct costs of this Bill of £20m per annum.

Section 3 ensures that banks which are big enough to pose a systemic risk to the financial system through their size and asset holdings do not adopt an investment strategy which causes the risk to the financial system to be borne by others – and thus solves most of the problems which caused the financial crisis of 2008.

Section 4 creates a supervisory regime for the creation of derivative instruments, the single largest source of systemic risk within the banking system at the moment.

Section 5 adds an exception to limited liability based on fault, meaning that where individual shareholders have caused a bank to adopt a strategy which leaves risk outside the bank itself, those shareholders will be liable to a greater extent than the value of their shares to those damaged by this risk strategy. This goes a long way to solving the 'moral hazard' problem. The limitation of the change to a few responsible shareholders and removal of the effect of defensive partitioning minimises any additional monitoring costs imposed.
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RayApparently
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Aye.
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Aph
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Probably abstain.
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SakuraCayla
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Aye, look forward to see what some people have to say on this though
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TheDefiniteArticle
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(Original post by Aph)
Probably abstain.
Why not aye?
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Aph
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(Original post by TheDefiniteArticle)
Why not aye?
Because it's really long and I'm not entirely sure I understand everything.
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TheDefiniteArticle
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#7
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(Original post by Aph)
Because it's really long and I'm not entirely sure I understand everything.
Basically, irresponsible banking, especially surrounding the creation and trading of derivative instruments known as 'collateralised debt obligations', caused the 2008 financial crisis. The same thing could well happen again today, because the crisis was caused (at least in part) by systematically externalised risk and insufficient regulation (see Rajan, Fault Lines). This meant that people acting rationally, combined, caused a financial meltdown - nobody acted against their own interests. By creating regulatory and supervisory regimes, especially for derivative instruments (which need not have actual assets backing them up, and therefore can see banks making huuuuuuuuuuge bets), this dramatically reduces the chance of the state having to bail out banks again, and also ultimately allows capital allocation markets to function more efficiently.
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barnetlad
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Why are we paying some people £2million a year? Or have I misread the Bill?
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Aph
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(Original post by TheDefiniteArticle)
Basically, irresponsible banking, especially surrounding the creation and trading of derivative instruments known as 'collateralised debt obligations', caused the 2008 financial crisis. The same thing could well happen again today, because the crisis was caused (at least in part) by systematically externalised risk and insufficient regulation (see Rajan, Fault Lines). This meant that people acting rationally, combined, caused a financial meltdown - nobody acted against their own interests. By creating regulatory and supervisory regimes, especially for derivative instruments (which need not have actual assets backing them up, and therefore can see banks making huuuuuuuuuuge bets), this dramatically reduces the chance of the state having to bail out banks again, and also ultimately allows capital allocation markets to function more efficiently.
Okay, it all looks okay, however the managers self-selecting I'm not a fan of.
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TheDefiniteArticle
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(Original post by barnetlad)
Why are we paying some people £2million a year? Or have I misread the Bill?
Because we want people who are competent, and willing to put in a decent amount of effort. We therefore have to compete with banks on wages for senior risk analysts insofar as we can (realistically most will earn more than £2m but this makes it a decent career twilight option). Go much lower and the people you end up filling the roles with see their work as basically charity, which isn't what you want for something like this.

(Original post by Aph)
Okay, it all looks okay, however the managers self-selecting I'm not a fan of.
I'm not 100% certain either, I'd like to hear more if you have any more ideas on this point.
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Aph
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(Original post by TheDefiniteArticle)
Because we want people who are competent, and willing to put in a decent amount of effort. We therefore have to compete with banks on wages for senior risk analysts insofar as we can (realistically most will earn more than £2m but this makes it a decent career twilight option). Go much lower and the people you end up filling the roles with see their work as basically charity, which isn't what you want for something like this.



I'm not 100% certain either, I'd like to hear more if you have any more ideas on this point.
I do understand the point about if the SOS picks that they would then be partisan, but self selection means they are more likely to choose friends over the very best people.
Maybe a parliamentary select committee would be better to be a little less partisan and more accurate as to who the best people are?
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Jammy Duel
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First definition and it's already a no on the basis of using RPI which isn't an official measure of inflation and hasn't been for some time

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McRite
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Aye, a good bill which improves regulation towards big banks.
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TheDefiniteArticle
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(Original post by Jammy Duel)
First definition and it's already a no on the basis of using RPI which isn't an official measure of inflation and hasn't been for some time

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IIRC some things (inflation per student loan repayments) are done in RPI.
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SoggyCabbages
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(Original post by TheDefiniteArticle)
IIRC some things (inflation per student loan repayments) are done in RPI.
He's got a point actually, didn't think about that in the Labour sub, should it not be the CPI instead?
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PetrosAC
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Labour regulating banking

Seriously though, I'll read over it properly tomorrow
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RayApparently
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(Original post by SoggyCabbages)
He's got a point actually, didn't think about that in the Labour sub, should it not be the CPI instead?
We might as well make the change - though it's an insignificant part of the bill as a whole.
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SoggyCabbages
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(Original post by RayApparently)
We might as well make the change - though it's an insignificant part of the bill as a whole.
Wouldn't say that's insignificant, CPI and RPI are relatively big in difference.
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RayApparently
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(Original post by SoggyCabbages)
Wouldn't say that's insignificant, CPI and RPI are relatively big in difference.
But as a part of the bill it's tiny. Inflation is mentioned once, just to say we'll adjust the IBRAB budget in line with inflation.
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Jammy Duel
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(Original post by TheDefiniteArticle)
IIRC some things (inflation per student loan repayments) are done in RPI.
Student loans are, but I would expect actual government stuff wouldn't, after all, SFE is merely a quango
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