As the banking industry's reputation falls ever further, John Humphrys considers whether trust in bankers can ever be restored
The resignation of Marcus Agius as chairman of Barclays Bank comes after the most damning remark a governor of the Bank of England can ever have made about bankers. Sir Mervyn King said last week that the era when a banker’s word could be regarded as his bond was well and truly over. Yet he was only stating the obvious. It is hard to think of a profession whose reputation has plummeted so quickly. "It is time to do something about the banking system," Sir Mervyn said.
How big is the problem and what chance is there that it can be put right?
The Governor’s comments followed a whole series of scandals, the most recent of which saw Barclays Bank fined nearly £300 million last week by American and British regulators for attempting to manipulate a vital international interest rate over a period of five years. The London interbank offer rate, or Libor, sets rates which govern a trade worth $360 trillion. This includes the ordinary rates families and small businesses have to pay for mortgages and bank loans. Barclays admitted ‘misconduct’.
Suspicions about what was going on go back to 2007 when the American authorities smelled a rat and started to investigate. Britain’s Financial Services Authority began doing the same in 2010. Last week the authorities published emails of exchanges between Barclays bank staff and associated derivative traders showing them promising each other bottles of Bollinger for their alleged collusion.
David Cameron responded to the judgement by saying that responsibility in the bank should go “all the way to the top”. The chairman has resigned but it is the chief executive, Bob Diamond, who is now in the firing line, holding on to his job (at the time of writing) by his fingertips.
Mr Diamond is already a controversial figure. Until he became Barclays’ CEO in 2010 he had been in charge of the bank’s hugely profitable investment bank, running it very much in the style of American investment banking where he learned his trade. It’s safe to say that that is very different from the ‘old-school’ style still prevalent in the City of London up to twenty-five years ago. His personal pay deal of £17m last year caused a huge outcry.
Mr Diamond accepted that the bank’s leadership should take collective responsibility for what had happened and, to show this, he would waive any bonus that might otherwise accrue to him this year. But to many people this was like a red rag: they think it monstrous that bank executives who are already paid enormous salaries should receive any bonus anyway, and especially at a time when the banks are being criticised for failing to do their job of lending at tolerable interest rates to struggling small businesses.
Time will tell whether the voluntary refusal of a bonus will be the only price Mr Diamond will pay. There has been a suggestion that Barclays’ staff tried to fix Libor only after a conversation between Mr Diamond and a deputy governor at the Bank of England, Paul Tucker, implying that the Bank had given a green light to the practice. This the Bank of England dismisses as ‘nonsense’ and Mr Diamond does not himself claim that that was the message. Rather, Barclays’ defence is that it engaged in this ‘misconduct’ only because it believed other banks were doing the same thing. If this turns out to be true (and investigations are continuing) then many other banks could face equally huge fines and similar shredding of their already threadbare reputations.
As if the Libor-fixing scandal were not enough bad news for the banks, last week a group of them, including most of the main names in British banking, were convicted by the Financial Services Authority of mis-selling complex interest rate insurance policies to small businesses that didn’t need them. The result has been catastrophic for many of these businesses and the banks have been ordered to compensate them.
All this, of course, comes in the context of the banks’ role in the financial crash of four years ago and the recession which has hit the world economy since and which Sir Mervyn King warned us last week could be with us for many years to come. Excessive and grossly irresponsible bank lending in the boom years prior to the crash is widely held to be a chief cause of the dire state we are now all in. That taxpayers are now bailing out these banks has added insult to injury.
Such irresponsible behaviour cannot be put down to a few bad apples in an otherwise fine barrel but rather to a culture of greed and excessive risk-taking which anyone participating in the industry has to subscribe to. In effect, as Sir Mervyn said last week, the metaphor should be the other way round: banking is a rotten barrel with a few good apples in it. He said: “Many people in the banking industry are hard-working and feel badly let down by some of their colleagues and leaders. It goes to the culture and the structure of the banks: the excessive compensation, the shoddy treatment of customers, the deceitful manipulation of a key interest rate, and today’s news of yet another mis-selling scandal”.
So what is to be done?
The Labour leader, Ed Miliband, has called for a full inquiry into the banking industry, along the lines of the Leveson Inquiry into the media. But the Government has rejected this as unnecessary on the grounds that we already know the nature of the problem – a view echoed by Labour’s own last Chancellor, Alistair Darling. Labour’s problem is that much that has occurred under financial regulations which its own government put in place. Instead of a full inquiry the Prime Minister has ordered an inquiry into the arrangements for setting Libor, a process which is currently unregulated. The Government is also considering bringing in a law to disqualify directors of banks which fail from taking up positions in the City afterwards.
There is also talk of criminalising other activities, such as attempting to manipulate interest rates - which is not itself a crime at the moment, though it is believed that the police are looking into whether any of those alleged to be involved in the Libor scandal could be brought to book under other criminal legislation.
Most of all, the Government is depending on its proposed reform of the structure of banks, following the publication of the Vickers Report last year, which recommended the splitting up of banks between their retail, high street functions on one hand and their investment banking activities on the other. The idea is that the former would go on receiving the implicit security of state bailouts if they got into trouble, whereas the latter would be on their own. Because investment banking is very much a highly competitive international activity it is hard for any country to bring in regulations to curb its excesses if it wants to retain any of the business. The idea behind Vickers is that at least the taxpayer won’t have to foot the bill if risk-taking investment banks get into trouble. The Government, however, has been criticised for watering down Vickers.
What’s clear is that the banking scandals have done serious damage to bankers, the City and the UK itself. Since Britain depends so much on its financial services industry this is no light matter. Whether trust in it can be restored is now the most burning issue facing the City and, indeed, the government.
What’s your view?
- How surprised are you by the banking scandals revealed last week?
- Were you affected by the mis-selling of interest rate insurance policies and, if so, how?
- Do you think the resignation of Marcus Agius from Barclays is sufficient or should Bob Diamond go too? Do you agree with Ed Miliband that there should be a wholesale inquiry into the banking industry?
- Should directors of failed banks be disqualified?
- Should there be new criminal sanctions on various forms of banking ‘misconduct’?
- Is the Government doing enough to implement Vickers?
- And what, if anything, do you think needs to be done in addition to restore trust in the bankers?
