Comment: Systemic reform only cure for banking cancer

By TERRY MURDEN
Published on 29/06/2012 00:00

SCANDAL upon scandal. After the greed, incompetence and recklessness that brought banks around the world near to collapse in the 2008-9 crisis, it is now revealed they were also secretly engaged in deceit and daylight robbery on the grand scale.

Trust in the sector was already at rock bottom. The attempted manipulation of interest rates has revealed a hitherto hidden practice that brings more shame on the banks and the champagne-swilling lifestyle of those who run them.

The list of those who could fall into the investigation is a potentially long one, extending to banks in Britain, mainland Europe and the US.

While the public may struggle to understand the meaning of “libor” and other such technicalities at the heart of this scandal, they are directly affected because libor – the London inter-bank offered rate – is a measure of how much banks borrow from each other and is used to set the price of credit cards, mortgages and other loans.

Such is the scale of transactions that even tiny movements mean that traders can make huge profits. And huge profits translate into equally huge bonuses which is why traders were keen to rig the figures.

Bob Diamond and three of his key lieutenants have already agreed to forego any bonus this year after the bank accepted £290 million in fines and fired at least 20 traders.

It will be surprising if they are the last casualties as this investigation spreads to other banks and organisations. The British Bankers Association, which oversees libor, also has questions to answer.

Banks have been telling us how hard they have worked to clean up their tarnished image, reposition their business models and transform the culture of excess into one that puts the customer back at the centre of everything they do.

Because of the progress made they have been able to persuade the authorities to soften some of the more demanding reforms such as the separation of functions and the clampdown on pay.

To a degree, the authorities – if not the public – have been willing to compromise, not least because the banks remain, for all their sins, key to the successful working of the economy.

The libor scandal dismantles all that hard work, reaffirming the public’s view of a cynical sector run by fat cats who care only for themselves. An update today from the Financial Services Authority on the alleged mis-selling of interest rate swap contracts to small firms will add to the banks’ woes. Criminal investigations are now under way into the libor issue and, with more heads likely to roll, the public’s distrust will only deepen amid calls for even tougher penalties than those so far imposed.

It’s clear that tougher regulation is not the answer. The problem is profound, and merely tightening rulebooks and slapping miscreants with fines will not cut out the cancerous elements embedded in the financial services sector. There are deep systemic problems that only systemic reform can root out and resolve.

Luxury and pleasure can ease economic woe

NEW figures show the recession was deeper than feared which suggests the economy will find it that much harder to recover.

A glimmer of hope is that a number of companies continue to trade well and a glance at any day’s business pages will reveal a smattering of healthy results and contract announcements.

Without diminishing the clear difficulties that many firms are facing, it seems some are managing to sail through the recession with a healthy backlog of work and, in some cases, benefiting from what might be termed the comfort factor.

That’s folk spending their money on luxury items and other delights to brighten up their lives.

It’s working for those selling top-end accessories and also for some of the pub chains. The hard-pressed consumer wants some respite from the grim flow of news and they’re treating themselves to an extra bar of chocolate, a cashmere sweater or maybe a gin and tonic at the end of another long day at the office.

Who can blame them when the governor of the Bank of England is warning of another five years of economic gloom?