City traders live in a world of their own. After the news of Barclays Bank's fine for falsifying LIBOR returns, its share price rose slightly. The scandal had been rumbling on for months, and they were relieved that it had been resolved. They had no idea about the approaching firestorm - which took a big toll on its price later that day. Later an investor was reported by the BBC (who may have been quoting a newspaper) that all this mob rule had to end. But as the hue and cry continues (this morning the Barclays chairman resigned), politicians and media commentators seem to be equally out of touch with what lies behind the scandal. Unfortunately that may mean that nothing useful comes out of it.
The LIBOR issue itself is being blown out of all proportion. That is understandable. So much of the unethical practice in the industry go unpunished that when somebody gets caught a disproportionate response is quite rational. That is the point that City insiders probably missed in their sanguine early reaction. But most of the comment has focused on the idea that the industry culture is thoroughly cynical and corrupt, and it is this culture that is the main problem needs to change. Criminal penalties are spoken of for unethical behaviour, and the familiar idea that the payment of big bonuses should be limited. The Business Secretary Vince Cable has called for banks' investors to rein the managements in.
That's all very well as far as it goes. The culture is awful. We shouldn't be too romantic about how things used to be, though. In the old City it may have been the case that "my word is my bond", but ripping off clients and living off fat commissions was rife. One point frequently made is that traditional upright commercial banking culture, such as displayed by Barclays's Quaker founders, has been corrupted as investment bankers have taken over. This is also true, but that fusty, conservative, self-absorbed commercial banking culture had to change. I well remember having lunch once at Barclays HQ in the 1980s: what a gloomy experience, for all the uprightness of those involved - there was no hope of us doing business with them because they would never be ready! We must look deeper.
The problem is that it is far too easy for big banks to make lots of money without too much effort. That is absolutely corrupting. Bankers naturally think that this money is added value for the highly skilled work they do to ensure that money flows to and from the right parts of the real economy. The rest of us are entitled to be sceptical. The profits which happen most years are wiped out in the bad years, when shareholders and taxpayers pick up the tab. The investment bankers have found a number of ways to make bets with other people's money, take the benefits for themselves, and make sure somebody else picks up the tab if things go wrong.
But that's not the only problem, here in the UK at least. There is also lack of meaningful competition. It is impossibly difficult to set up a new bank to compete with the existing oligopoly. The remaining banks have been allowed to consolidate into a small number of behemoths. The regulatory authorities, including the Treasury and the Bank of England, as well as the FSA, have been complicit in this. They prefer a cosy club of large organisations with big compliance departments than the rough and tumble of competition that, for example, the Americans or Germans experience.
The aim of public policy should be to make banking less profitable, so that the banks can't pay massive salaries and bonuses, and more competitive, so that customers benefit from real innovation. This needs the British authorities to do three things in particular:
- Make it much more difficult and expensive for investment banking and financial trading operations to secure finance. Separating investment banking from commercial banking, as recommended by the Vickers Commission, is a good first step, though may not go far enough. Increased capital requirements, as now being imposed globally, is another. Regulators need to be particularly hard on bigger institutions, and not let the idea that larger operations are more efficient take hold.
- It must be much easier to set up new banks, both in commercial banking and investment banking. The issue isn't the amount of regulatory capital required, but a host of other obstacles placed in the path of new banks.
- While regulation needs to lighten up on the creation of new banks, it needs to be tightened on the regulation of lending operations. We should not allow runaway growth of credit, especially that linked to the purchase of purely financial investments, and, it has to be said, to real estate.
All easily said. But the trouble is that it is quite painful. Attacking bank profits will look like an attack on one of a limited number of industries where British based operations are internationally competitive. Easing up on creating new banks means tolerating more banking failures and creating a more challenging environment for regulators. Restricting credit means curtailing the British love affair with property ownership.
It is easier to bang on about culture and lock a few people up. The one good thing about the crisis is that it helps keep the pressure up on the Vickers reforms. But when the dust settles the usual City types will be having a quiet word with their counterparts in the Treasury, Bank of England and the Prime Minister's office about not throwing the baby out with the bathwater. The reforms will be quietly defanged. Bankers will continue to lord up. Taxpayers will continue to be exposed. And the British public will continue to be let down by bankers and politicians alike.
Let's hope that this does not come to pass. Critics of the banking industry will need to keep the pressure up.