FIVE years on from the onset of the global banking crisis which brought HBOS and RBS to their knees, our banks seem to be in a worse state than ever.
As if grossly imprudent lending was not enough, a succession of scandals, from the mis-selling of payment protection insurance to the manipulation of the Libor interest rate, has resulted in colossal fines and sanctions.
Both of Scotland’s biggest banks are still chronically dependent on taxpayer support. The £390 million fine imposed on RBS last week in the wake of the Libor scandal marked a new low for what was once our largest and most feted company.
It would be a consolation of sorts to be able to say that this five-year reign of error is over and that the banks can now “move on”. But RBS faces the threat of litigation in the United States and there is every possibility of the Libor scandal ending up in the courts. Little wonder public outrage at bankers’ bonuses shows no sign of ebbing. Why, looking at the extent of market abuse and the scale of fines being imposed by regulators here and in America, are any bonuses still being paid at all?
Welcome to the hell that is the banking sector today. And arguably its most depressing feature is that there seems no agreement on where redemption can be found.
When Stephen Hester took over as chief executive of RBS in 2009, it was commonly asserted his biggest problem was in tackling the bank’s bloated balance sheet and reducing the mountainous pile of rotten debt.
Mr Hester has indeed made considerable progress here. The balance sheet has been shrunk and hundreds of millions of pounds of assets have been sold off.
But deleveraging was not the bank’s biggest problem. It was the need to restore ethics to the sector and change the rotten culture within the bank. But how can such a culture change be effected?
In facing these questions, RBS is far from alone. The banking sector here and in the US has been wracked by fresh scandals and revelations of misdeeds stemming from greed and weak regulation.
The mis-selling of payment protection insurance has mushroomed into one of the biggest consumer finance scandals in British history. Amounts set aside are now reckoned at £13 billion and, according to industry sources, could peak at £25bn.
In the unravelling of the Libor scandal more than a dozen banks have been under investigation by authorities in Europe, Japan and the US. Barclays has already been fined £290m and the scandal cost its insouciant chief executive Bob Diamond and chairman Marcus Agius their jobs. Lloyds and HSBC are also under investigation, while Swiss bank UBS has been fined £940m. Breaches of anti-money laundering rules have also seen spectacular punishment. Standard Chartered was fined $340m (£215m) in September by a New York regulator for illegally hiding transactions with Iran, and Lloyds forfeited $35m in 2009.
The mis-selling of interest rate hedging products is fast climbing up the scandal ladder. The Financial Services Authority says it found more than 90 per cent non-compliance in 173 interest-rate swap test cases it examined. So far Barclays has set aside £450m for compensation, HSBC about £150m and RBS £50m.
So RBS is by no means alone. But the FSA’s report into the bank’s misdeeds over Libor was a particularly scathing indictment of the culture within RBS. This was no case of one or two “bad apples”: it found misconduct was widespread. At least 219 requests for “inappropriate submissions” were documented (not including an unquantifiable number of oral requests) and at least 21 individuals, including derivatives and money market traders, were involved in “inappropriate conduct”. Since RBS operated a business model that sat derivatives traders next to Libor submitters and encouraged the two groups to communicate without restriction, manipulation was easy to effect.
There was one other disturbing feature. As recently as March 2011, RBS testified to the FSA that its Libor-related systems and controls were adequate. The regulator found this not to be so and that the bank had failed to identify the risk that Libor submitters would make submissions “reflective of derivative trader requests and the impact on the profitability of transactions in their money market books”.
Why did the traders behave as they did? Greed would be the easy answer. But I suspect that at RBS, as in other banks, traders were under pressure to meet targets for profits and as they were well rewarded for doing so, abuse was inevitable. The culture of target-driven sales of PPI products in the branches quotas is a variant of this pressure. “Lone greedy traders” does not cut it as an explanation.
So changing the culture is the priority. Here RBS has two elements working in its favour. The first was the public recognition by Mr Hester last week that such change is the key priority he has to address. The second is that he has within RBS thousands of loyal and hard-working branch and counter staff untainted by this scandal and who have to face the public on a daily basis. Their service and conduct, as millions of branch customers can testify, has been exemplary. Mr Hester can lay fair claim to an ability to rebuild an ethical culture from the bottom up.
The second is the work being done by organisations such as the Chartered Institute of Bankers in Scotland to place ethics and corporate governance at the centre of their staff training and diploma courses. And across the wider banking sector, leadership is being shown on this front, notably in Scotland by Susan Rice, managing director of Lloyds Banking Group Scotland, who has been tireless in her public commitment to rebuilding ethical standards.
It may well be that the wheel of change will not fully turn until the Serious Fraud Office is brought in and criminal prosecutions embarked upon. The breach of ethics has been so great that guns must go off to achieve the fullest salutary effect. Libor fixing was not a victimless crime. Diffuse though its effects may have been at the retail level, it posed a significant threat to the interests of savers, depositors and borrowers.
Culture change is neither easy nor swift. It will take years to effect. But it is a necessary first step to the restoration of public trust in a sector of which Scots were once so proud. And bank leaders need to act. For who would want to hold a share in any re-privatised bank until sweeping change is made?