The anticipation was high but the outcome instead left key questions unanswered. Bob Diamond probably benefited from testifying soon after the revelations about LIBOR fixing emerged. His interrogators had little time to prepare and, perhaps for some, to familiarise themselves with how inter-bank interest rates are set.
The full story of what happened to LIBOR interest rates, who was involved, and who knew what and when, has yet to emerge. So far the spotlight has only been on Barclays and the Treasury Committee has not been party to all the evidence held by the various regulators looking into the issue. On that basis we were probably never going to get a forensic examination. The relatively disjointed nature of the questioning did not help matters but MPs did not have a clear target to hit. Diamond was reticent about what severance package he would take. He referred questions on that subject to the Barclays board, though his reluctance to be forthcoming on this did not gain him any favours at the committee meeting.
Unfortunately we have heard relatively little about interest rate manipulation that took place in the years before the financial crisis. Instead, the focus has been on those dark days in 2008. The financial crisis is now five years old; we can sometimes forget that it began in 2007. Strains in markets led to a drop in confidence in banks and Northern Rock went under. The following year, the financial system was still under great pressure, with the fall of Lehman Brothers and the near-collapse of the system itself before banks such as Royal Bank of Scotland and Lloyds were bailed out by the government. We have learned that in 2008 a conversation took place between the Bank of England’s Paul Tucker and Diamond. So far we have only the latter’s account of the conversation, in which Barclays’ LIBOR submission was discussed. However, despite reports that we could expect a controversial revelation, Diamond told the committee that he was simply being warned there was a nationalisation risk to Barclays because people were concluding it was having difficulty borrowing.
Further investigations into LIBOR fixing are under way and it seems likely that other banks will be named soon. Many have had changes of leadership since, so their top people may not be so vulnerable. What further revelations may do is compound the deep sense that banks are institutionally incorrigible. They are very clever – at finding new ways to lose money. The LIBOR scandal suggests they simply cannot be trusted to run themselves well.
This goes to the heart of the debates about the City since the crisis began. If only the right people could be appointed to run the banks, it has been argued, they could set the overall ethical tone and ensure bad practice does not take root. This argument has also been used about the press, of course. The problem is that there is no guarantee and even if you could find a holy person to run a bank they would not be there forever and may not be able to impose their will on the organisation anyway.
That points, of course, to structural reform. It is here that most politicians have been behind the curve. From the outset of the financial crisis, a formal separation of banking activities should have been pursued, keeping retail banking apart from riskier activities. Certainly Labour should have pursued it. After all, we want power and wealth to be enjoyed by the many and not the few. There was some support – when the Christian Socialist Movement got behind an Early Day Motion on splitting banking in 2009-10 it attracted a good number of signatures (including from one Vince Cable MP). If Labour had adopted this policy it would have been making the political weather on finance for the past few years.
Structural reform is not only about putting in firebreaks against undemocratic accumulation of power; it is simply a good way to stop utility banking activities being put at risk by the more ‘casino’ end of the City. The Vickers report stopped short of a complete separation but did argue for ringfencing retail banking. The latest revelations about our banks should help ensure Vickers represents the minimum reform, though even now it is vulnerable to banking sector lobbying.
Some sort of larger-scale review of banking, and its relationship to the rest of society, does seem necessary. In the past, the case would have been made for a Royal Commission but a judicial inquiry of some sort might get to answers more quickly and provide an opportunity for catharsis. It might also remind us that banks, when they work well, provide essential services and employ thousands of decent people. Fundamental reform would help keep things that way. However, an independent inquiry is no substitute for original thinking within the Labour party itself. We were largely silent while the Vickers report was being written. We now need to be more positive and generate new ideas about how banking can be more accountable, how people can keep their money safe, and how businesses can have access to finance.
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Stephen Beer is senior fund manager at the Central Finance Board of the Methodist Church and author of The Credibility Deficit – how to rebuild Labour’s economic reputation. This article represents his personal opinion.
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Comment by Anthony Sperryn
Ain’t it awful!!!
The British are currently indulging in one of their fits of self-righteousness. Bob Diamond is the latest version of Admiral John Byng, who was shot on his own quarterdeck in 1757, “pour encourager les autres”, as Voltaire put it. It has to be noted that the British Government at the time hadn’t provided Admiral Byng adequate manpower and equipment for his required engagement with the enemy. This is the counterpart of present day “light touch regulation”.
Bob Diamond is either a very good actor, or he didn’t know what was going on.
My present view is that he didn’t know what was going on (until very lately, whereupon he appears to have worked very diligently to put it right). I may be wrong. I have no inside information.
Nevertheless, I am inclined to believe that it was not his job to know. His job was to to see that there was someone in Barclays who could be trusted to hire the right people to carry out the policy agreed by the board of directors and implemented by people under the control of the chief executive). Day-to-day supervision of the activities of 14 individuals in an organisation with ten thousand times that number of employees is not easy in any case. I am not making any excuses. £290 million, large though that may seem to people, is not too serious in the context of Barclays’ profits as a whole.
The current approach of business, including banks, is, in general, to procure added value for shareholders. This reflects the current understanding of the law, as enacted by parliament. It is also becoming increasingly recognised that it is important to treat customers and staff properly. But, as one chief executive of a major British bank said to a lecture audience at the Institute of Bankers many years ago (I attended): “You can have customer satisfaction, but you can go broke.”
This is not the place to go on at length about my long period of observation of British business and finance. There seems to be a recurring cycle of something or other going wrong as a result of the public and the bankers getting over-excited about a new product or gimmick, a booming market, a new dawn of economic growth, whatever. I won’t make comment here about the individuals employed in banking.
With regard to the current Barclays situation, let me just point out that it was clear by the end of 2007 that the interbank market had seized up. In such circumstances, estimates are often used, but one has to realise that the whole concept of a free market is inapplicable. Fudges are often used to ensure the “solvency” of an organisation, though there is a dire and possibly extremely damaging tendency, or requirement, to “mark-to-market”, which is unreal at a time of market failure.
In any case, it is difficult to be sure that “fiddling” is not endemic in business and public life as a whole (regrettable, though this may be).
One of the sad things is that much of the management of the financial system has been “top down”.
In contrast, “bottom up”, or people-friendly, banking regulation would look at all those things that niggle the customer, such as excessive fees and that abhorrent form of contract for credit cards, which allows the bank to change the terms of the contract at its own discretion (which I am told by a US lawyer is point-blank forbidden in America).
People-friendly regulation would also recognise that savings need to be protected and that there is one middle that is allowable to be squeezed, which is the margin between lending rates of interest and borrowing rates of interest, one of the elements contributing to the availability of cash for bankers’ bonuses.
Another aspect of this is that banks, in the past, have been given free rein to make money on the supposition that it is easier to collect tax revenue from them, rather than from their customers who might become richer with lower finance costs and higher interest receipts. Consequent benefits to the economy as a whole seem to have been ignored.
There are huge risks in “utility banking activities”, because the bank has to find some poor devil of a customer to lend to who is going to be safe. Not easy when the class of entrepreneurs is inclined to push its luck (I won’t spell that out).
Even bank clerks cost money. I’m not sure whether or not they cost more than the fancy (or the not so fancy that they might get) computer systems, cash machines and so on that the public demands. It may be that “utility banking activities” are simply not profitable enough to meet operating costs, let alone shareholder demands (and investment managers are a demanding lot), without the banks having a punt in the casino.
[For what it is worth, my view is that proposed financial transaction taxes have merit mainly
in inhibiting transactions, such as computer-driven trading, derivatives(etc) trading
and short-term speculations, which have the effect of enriching the insiders at the expense
of the rest of us by way of distorting prices, rather than raising money. Raising money, per se,
will depend on the continuance of the transactions that hurt us by distorting prices.
The Barclays episode shows just how easily insiders can distort markets for their
own enrichment at the expense of the rest of us.
While I’m at it, I state my belief that banks syndicating loans ought to be treated as a
casino activity.]
In years gone by, when salaries were less flamboyant, transparency was not all the rage. The big banks quietly tucked away what were known as “hidden” reserves and their stability was unquestioned. It is the recent relentless drive for profit, efficiency and, yes, competition that has led to present instabilities. Much of all this drive (as opposed to the balanced approach everybody now seems to be wanting) started with Mrs Thatcher arriving in 10 Downing Street.
When Northern Rock was rescued in 2007, it seemed to me that the rescue was done because it might be easier than propping up the whole of the housing market. The precarious present state of the economy, what with RBS and Lloyds and lots of quantitative easing, indicates to me that there is probably a high degree of failure in the housing market, so that stated values are questionable. I think one has to bear this in mind in any re-assessment of the banking industry. It was largely bust in 2008. It may still be bust. Its alleged profits are essentially transfers from the state and depositors to bank shareholders.
One can’t turn the clock back. In practice, drastic change is liable to bring chaos. In my view, it is only highly detailed changes to practice, and some radical changes in the law (eg : Do we still want caveat emptor-( let the buyer beware)) that will “democratise” our financial system. The Big Bang of 1986 disturbed the UK financial ecosystem. It will need a lot of thought to work out what we really, really want. I hope these comments help highlight the issues.
Anthony Sperryn