Thursday, 12 July 2012

Balancing Act: The future of British Banking

There have been so many scandals over the last few years that it is difficult to remember which came first: Politician’s expenses, then phone hacking, then LIBOR? Or does the new LIBOR scandal technically come first, since British banks have been found guilty of manipulating a key financial rate since back in the noughties? (Pun intended.) Just when Bob Diamond’s statement that the ‘period of shame for British banking needed to be ended’ couldn’t get any more infamous, it emerged that the banks had been guilty of pushing unnecessary financial products onto small business (who then went bankrupt), and now this. The British public have a right to be outraged; anyone observing from outside the country may be forgiven for thinking that this island, normally a bastion of law and order and ‘gentlemanly capitalism’ has suffered a severe case of moral decay. The debate has significant moral implications but is imposing regulation on the banks the right thing to do?

To backtrack slightly, LIBOR (London interbank offered rate) is essentially the rate that determines how much it costs banks to borrow money from the markets, and it underpins a market worth £350trillion. Since it is made of estimates from eighteen banks in London, it can technically be fiddled, although the system discounts the highest and lowest figures and takes an average of the rest. The scandal itself can then be separated into two parts. Firstly, during the boom years, Barclays (and possibly twenty other banks being investigated internationally), manipulated the rate by working with one another to drive it up when it was good for business. Secondly, after the crash, Barclays was found to be deliberately estimating a lower rate in order to make their business look stronger. This distinction is important to make: During the first period the manipulation was done to maximise profit, and could therefore be “the biggest securities fraud in history” (The Economist). However the second period is more morally complicated.

Since the crash, every person in the UK has forked out £19,000 to support the banks. The prosperity of them is, to some extent, in our self-interest. Barclays in this case massaged the rate to make the bank appear stronger and therefore save the taxpayer. And thus we come to the role of the Bank of England and the politicians. An on-going evolution of the scandal has occurred since Bob Diamond claimed that he had the tacit consent of the Bank of England and regulators to manipulate the rate. In the aftermath of the financial crash of course, politicians were desperate to keep credit flowing and the industry afloat.

The government seems caught between a rock and a hard place: On the one hand, if they choose to enact a ‘witch hunt’ against the bankers and bring in constricting regulation, Britain could lose its most dynamic industry, the only industry in which Britain is truly a world leader. Competition from Hong Kong, Mumbai and Dubai should be taken seriously.  On the other hand if they let them get away with it, the public will be outraged, and more than ever the government and the banking elite will be seen as sleeping in the same bed. This is especially so after the Bureau of Investigative Journalism this month revealed that the City has spent £92million on political lobbying alone in 2011. This has led to such policy successes as the slashing of UK corporation tax and taxes on banks' overseas subsidiaries, and neutering of a national not-for-profit pension scheme launching in October that was supposed to benefit millions of low-paid and temporary workers. (The Guardian)
Moreover, the government’s future policy will also be framed against the 2011 riots, an occurrence that has largely been swept under the carpet in the year since. Exemplary of the heavy-handed response was the sentencing of a student with no previous convictions to six months in prison, for the theft of a £3.50 bottle of drink. (The Week.) Any non-action against bankers will be juxtaposed against such extreme measures against the less well off. Indeed, a strong argument can made to link the financial crisis, caused by irresponsible banks, with the frustration and disenfranchisement felt by many poorer young people that spilled over last summer.  An even broader suggestion would be that Britain’s financial sector has been the driving force behind the long-term stratification of this country.
The banker’s argument, that Britain is dependent on the industry’s prosperity, is to some extent true. But would the industry really suffer such a blow if regulation was brought in? The Observer has remarked that endemic corruption will only end when bankers know they are likely to get caught and face stiff penalties – mere condemnation and calls for a change in culture won’t cut it. Across the pond, American law firms are lining up to represent clients from multinationals to Baltimore City council, who say they have lost money as a result of banking manipulation. Here, the Financial Services Authority (FSA), the watchdog accused of turning a blind eye to LIBOR fixing, has disingenuously stated that no one has any lost money.

Bagehot in The Economist has reasoned against a public enquiry: “Public anger which vents itself on individuals and moves swiftly on does nothing to make the system work better; and, if the pendulum swings too far, it may endanger the country in the long run.” Nevertheless, something substantial needs to be done. Whether it is through a judicial inquiry or parliamentary investigation, there needs to be a significant overhaul of the structure of British banking. They are essential to our prosperity, yet act increasingly antisocially. Most of all it is for British morality and justice that our financial sector needs to be reformed.

Just as the press is being held to account for its actions, and regulation reformed, so too the financial sector needs to face serious penalties: Without more regulation there is simply too big an incentive to cheat and manipulate, and there is no reason to suggest that a more responsible and regulated sector could not still compete globally. I for one am glad that these scandals keep occurring, for they seem to be the most effective way to muster public support in favour of change.


  1. An interesting take on regulation by Nial Ferguson, is regulation posing as the cure when it is really the illness. I think this is the Reith lecture, check it.

  2. Im so confused by all this: how can such smart people disagree so much? the only conclusion to make is that there is never a right answer, right?