Tag Archives: Barclays Bank

Behind the theatrics on Barclays, what needs to be done?

Predictably enough the Barclays Libor scandal is generating rampant theatrics amongst both journalists and politicians.  It is not easy to keep grip on what actually matters.  And yet this is vital when it comes to deciding what the next steps should be.

One piece of theatre is a sort of whodunnit, amongst Barclays senior managers, and government and regulatory officials.  How much did they know?  What did they authorise? One line of attack concentrates on Bob Diamond, the former Barclays Chief Executive, whose evasions at a parliamentary select committee yesterday created predictable anger.  The real point behind this is the question of how far up the chain of command should responsibility for unethical behaviour go?  Should bank chief executives be like Royal Navy captains, as John Kay suggested yesterday in the FT, and take full responsibility for everything that happens on their ship?

A further twist comes from the thought that there may have been an element of government connivance in the second phase of manipulation, as the financial crisis was in full swing.  The hope amongst government politicians is that something can be pinned on Labour figures such as Shadow Chancellor Ed Balls.  That looks a long shot.  Experienced political operators like Mr Balls don’t leave fingerprints, and there were legitimate reasons at the time for an interest in the behaviour of Libor.  But the Labour’s case wasn’t helped by a radio interview with Baroness Vadera, Gordon Brown’s economic adviser, yesterday lunchtime.  She was evasive, confusing the two very different phases of the scandal (i.e. the first phase of manipulation for to make trading profits, and the second of official manipulation for wider politcal purposes).  It gave the impression there was something to hide.  Other key Labour figures, such as Mr Balls and Lord Myners, the former City minister, are giving much more confident performances, though.

Centre stage for the theatrics today is the argument as to whether any enquiry should be a full judicial one, like the Leveson Inquiry into the press, which Labour are asking for, or the government’s preferred option of a quicker parliamentary one.  Both options have merit.  A judicial enquiry gives the whole thing an air of importance, and legal interrogators are much more effective than grandstanding politicians; it would keep the City types on the ropes for longer.  But lawyers are unlikely to contribute much of value to designing a solution.  A parliamentary enquiry would be a quicker way to actually change the law, as well as creating less complications for any parallel criminal investigations.  What is actually needed is an expert commission – but we’ve already had one of those, the Vickers Commission – which indeed pointed towards some of the solutions.

But what actually needs to be done?  In principle this isn’t difficult.  Investment banking activities do play a useful role in the modern economic system, and aggressive trading culture can help the process of what economists call “price discovery” – spotting and correcting where the prices of financial instruments don’t reflect the world’s realities.  Short-selling the shares of badly performing companies looks ugly, for example, but it does improve accountability.  But the usefulness of investment banking is distorted by two problems:

  1. Using other people’s money.  Where traders use borrowed money to trade with, which is the bulk of what they do, then they are not taking full responsibility for the rsiks they are taking, and the whole balance of incentives gets skewed.  Trading soon escalates to levels beyond the socially useful. The volume of borrowed money used has risen massively over the last couple of decades, and many traders probably don’t even understand the idea of using their own capital to bet with.
  2. Trading culture struggles to recognise ethical boundaries.  A disagreement over price is one thing, but manipulating systems designed help people is another.  Fiddling Libor (especially in the first phase of this scandal) was one such transgression, as are various scams to exploit the way mutual funds are priced.  The UK regulatory authorities can be too soft on this.

So in essence what needs to happen is this:

  • Isolate banks’ trading and derivative activities from ordinary economic deposit-taking and commercial lending, and attach separate regulatory regimes to each.
  • Clamp down hard on unethical behaviour – with chief executives and directors taking full responsibility for what happens in their organisations.  Ignorance should not be a defence – and if that means some organisations become impossible to manage, then they should be broken up.  Sanctions should hurt, and include the criminal law (though remember that its higher burden of proof can get in the way).
  • The money supply to investment banking operations needs to be choked off, so that only those that fully understand the risks are supplying it.  Isolation will help here, but may not be enough.

The principles are easy, but the details are all important.  The problems are global but it will be very hard for us in Britain.  The City is so important for our overall economy that we are easily scared away from being too tough.  But if the attraction of the City is that it is easier to do unethical business, then this is not a recipe for long-term success.  We can still have a thriving financial services industry with niche operations based on genuine knowledge and expertise of the real world, and the provision of solid, well designed infrastructure and systems.

Next steps?  I think an enquiry is a bit of a distraction, so the government’s option is probably better.  the government perhaps using this enquiry as cover, must go back to the Vickers proposals and implement them in full.  Going beyond Vickers to enforce the full separation of investment and commercial banking should be considered.  And as for culture change, that needs to happen at the regulators, including the Bank of England, as much as the banks themselves.  A change of senior personnel would help here.

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Barclays scandal: culture isn’t the problem, it’s the money

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:

  1. 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.
  2. 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.
  3. 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.

 

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