THE OLYMPICS is a welcome respite for the banking industry after weeks in the media spotlight. Finance, and the City generally, has suffered a serious blow to its reputation. A period for some reflection should be welcomed.
The British banking industry is being judged harshly by comparison with other industries and other countries. Certainly, the Libor scandal is more of a global banking issue – there has been far worse rate-rigging in America. But this rather misses the point. There have been serious issues in the banking industry and, for the time being, the City is firmly in the political and media spotlight. It will stay there as long as the Tyrie investigation continues – and perhaps longer. Of course, one should argue for a sense of perspective, but this will get no traction for the time being. Issues have to be recognised and addressed.
It is of the nature of such events that, by the time the media explosion occurs, problems may be well on the way to be being addressed. There have been failures of regulation. And new regulations are being put in place, including tougher capital requirements and a complete overhaul of the regulatory structure. The latter, in itself, creates some short-term issues, as does all restructuring, and the sooner the new system is fully effective the better. And no doubt Barclays and other banks have already largely put in place arrangements to deal with the Libor issue specifically.
When the history of this comes to be written, the Libor affair will be deemed to be have been blown out of all proportion. But often it is the smaller issues that prove to be the game-changer. And so it is with Libor. The reaction to the fine shook everyone – Barclays, regulators and government. It was only after the reaction that the authorities lost confidence in Bob Diamond.
The banks, and to some extent other financial institutions, must carefully review all their practices to ensure that they stand up to external scrutiny while they are in the firing line. The game has changed. Activities that seemed acceptable business ten years ago will no longer be considered in the same light. “Everyone does it and the authorities knew about it” may be logical, but logic may well not be sufficient. Practices in which very high profits are made, or remuneration is out of line with comparable activities, should be carefully scrutinised.
Banks are searching for solutions that will restore trust. People changes will help – certainly at Barclays. Clear evidence that some activities and practices have ceased is necessary – recognising that this will cost jobs. Codes of practice and the like may help, but only if they are more than words. Unless banks have a highly-effective compliance system in place, when there is a clash between ethics and codes of practice on the one hand, and remuneration on the other, remuneration will win.
Bankers can muse that life is unfair, but they need to get on with dealing with the world as it is.
Mark Boleat is policy chairman at the City of London Corporation.