Black days for UK banking

Until recently, Mr Bob Diamond, CEO of Barclays, and former head of its investment banking division, had come to be something of a PR man for the entire banking sector.

In January last year, he declared before a parliamentary committee that the time for “remorse and apology” by the banking sector was over.

He then used a prominent BBC lecture in November to recount the endless good and crucial work his and other banks did. ‘To the question ‘can banks be good citizens?’ the answer must be ‘yes!’” he declared.

While he had been told three years before that no one would believe him, things were indeed changing. “You may not be able to see what’s different today, but over time I very much hope you will see that and more,” he pledged.

His words, which convinced few at the time, seem all the more laughable now that the bank finds itself caught up in a cross-Atlantic investigation, involving the US Department of Justice, the US Commodities Futures Trading Commission and Britain’s Financial Services Authority, into how several major banks tried to manipulate the key interest rates that determine the pricing of all sorts of financial products from derivatives to mortgages.

Barclays last week agreed to pay a total of 290 million pounds (Rs 2,500 crore) to settle claims that some of its traders attempted to manipulate the London Interbank Offered Rate (Libor), used as a benchmark globally for short term interest rates.

‘Modern cesspit’

The bank faces two charges. Firstly that some traders attempted to influence the submissions made by their treasury division to the British Bankers’ Association on the rate at which they expect to borrow, in order to benefit their own trading positions.

And secondly, that the bank reduced its Libor submissions to ward off speculation about its financial health during the height of the financial crisis. The former was “wholly inappropriate behaviour” while the latter was “wrong,” Mr Diamond admitted following the revelations last Thursday.

The last couple of weeks have arguably been the roughest period for Britain’s banks since the bailouts at the height of the 2008 crisis, coming at the tail end of Royal Bank of Scotland’s software debacle, which raised questions about that bank’s strategy and cost cutting since its bailout by the government.

And in a separate inquiry, the Financial Services Authority found that Barclays, RBS, HSBC and Lloyds had mis-sold interest rate swaps — insurance products designed to help firms hedge against a rise in interest rates — to thousands of small and medium-sized businesses.

The developments have reinforced the lowly opinion of the banking sector among large sections of the public. Details that emerged — such as the external trader who promised to open a bottle of Bollinger for a Barclays trader who agreed to try and lower the rate they submitted — seemed to verify the very worst fears.

“Greedy, shoddy, deceitful. A Modern cesspit,” declared the Independent newspaper, in a headline summing up the public mood.

Scathing criticism

It’s opened up a whole new set of questions about the country’s ability to hold its banking sector to account. Mr Diamond, who headed the bank’s investment banking divisions at the time the violations occurred, has been defiant in the face of calls for his resignation, attempting to distance himself as much as possible.

“I am sorry that some people acted in a manner not consistent with our culture and values,” he said — a claim that seems particularly ironic given that his long standing reasoning for why more regulation of the sector should be limited was because the sector was in the capable hands of those who knew best.

On Monday it was Mr Marcus Agius, the bank’s chairman who resigned, saying the “buck” stopped with him. By contrast, Mr Diamond agreed to hand back his 2012 bonus, along with three other senior managers.

As for those directly involved in the manipulation, the bank has offered nothing to suggest that any action has been taken against them.

Britain’s establishment has been scathing in its criticism. The governor of the Bank of England, Sir Mervyn King, admonished the banking sector for its “excessive levels of compensation, shoddy treatment of customers and a deceitful manipulation,” while the Chancellor, Mr George Osborne, lambasted the “systematic greed at the expense of financial integrity and stability.”

Regulator helpless

Mr Diamond will face tough questions when he appears before a parliamentary select committee on Wednesday.

Yet for all the fiery language, what has become most apparent is how limited the regulator’s powers to do much are. The FSA won’t be able to bring criminal charges, because Libor doesn’t count as a “qualifying instrument” under the law, the head of the regulator said on the BBC at the weekend, as he called for a strengthening of the laws, including to prevent a director of a failed bank to return to the industry.

Public confidence, meanwhile, remains low: just one in five believes the FSA is effective in regulation, while two-thirds believe that government will not act in their interest when implementing banking reform, according to a weekend poll.

In truth, despite the many inquiries and for all the tough talk, scant little has been done to improve the notoriously light-touch regulation of London’s financial sector over the past five years. (US legislators recently hit out at the role lax regulation in Britain played in the losses at JP Morgan, AIG and MF Global).

While the conditions that created that culture date back to Margaret Thatcher, and were subsequently perpetuated under Labour governments, the current coalition has been fighting the City’s corner with zeal, even threatening to jeopardise its relationship with the rest of Europe over proposals for toughening up regulations at an EU level.

No matter what havoc it had wrought on the British economy, the financial sector was crucial to the nation’s future, the theory went.

And underlying policy and the regulatory approach was the assumption that the banking sector could, when push comes to shove, be trusted.

How else could something as crucial globally as Libor continue to have been set based on the bank’s own submissions of what they thought they would borrow at, rather than actual transaction prices?

These issues point to matters far deeper than the immediate case of Barclays and the manipulation of Libor: to the pedestal that Britain (and other nations) still seem to keep the banking sector on, no matter how much havoc it has wrought.

( >blfeedback@thehindu.co.in )

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