THE 2007-8 banking crisis was a disaster for London’s international position as a banking centre. But financial services is much more than just banking. It includes areas such as insurance (in which London’s position is strong internationally, though by no means dominant) and securities and broking – in which London had every prospect of remaining the world’s leading player. Even as Asian banks grew, perhaps replacing now part-nationalised British banks in the lists of the world’s greats, those emerging banks (along with growing large Asian corporates) would still require wholesale services – which London was extremely well-placed to supply.
The Libor scandal threatens to end that hope. Libor co-evolved, from the mid-1980s, with London’s role in securities and broking. It is the key reference rate, internationally, in areas such as futures contracts, swaps, and currencies, along with many wholesale financial products. As the credit crunch began in 2007, the term Libor entered broader public consciousness, as the spread between Libor and the bank rate became the most widely-known measure of the financial sector’s woes.
All around the world, contracts are normed against Libor. Investors that would not trust the probity of locally-determined reference rates that might be manipulated for political or corrupt purposes trusted English law, the honour of English gentlemen, the culture of “my word is my bond”, the reputation of “as safe as the Bank of England”, the excellence and integrity of UK and London regulation.
With the Libor scandal, that is very probably now gone. Heads are rolling at Barclays, RBS has fired traders, the government has announced an official inquiry – which may yet mean more heads rolling in more banks – and even the Bank of England has had its probity impugned. The more heads that roll, the broader the scandal; the fewer that roll, the wilder the conspiracy theories will get.
The London interbank offered rate will become a byword for dodgy practice – the word “London” built into an irredeemably toxic term. International investors will develop their own new reference rates for financial contracts – and those rates probably won’t be in London. If matters escalate, this could easily turn into an event of a similar order to the end of sterling as a reserve currency, in terms of the impact on Britain’s financial role in the world. British securities and broking could be sucked into almost as dismal an outlook of medium-term decline as the British banking sector.
The symbiotic relationship between the UK banks and the government of recent decades has been corporatism of a quite shameful and indefensible nature. Implicit bailout promises vested the positions of major firms, closing out proper competition and encouraged lax internal monitoring and risk management, over-merging and excessive, dangerous balance-sheet growth. As tax revenue flowed, lending exploded and jobs grew, the industrial policy goals of governments were met, and the temptation to look the other way, in terms of lax supervisory control and tax forbearance appears, all too often, not to have been resisted.
Bizarrely, however, a common reaction to this cataclysm of mis-regulation and over-involvement of government in the sector has been to call for yet more government. How can so many people continue to fail to see that excess government – bailouts, cosy relationships leading to supervisory laxity that would not occur in other less-regulated sectors, and tax forbearance – has been a central root cause of these problems? It is as if a man with a terrible hangover thinks the solution is to get even drunker once more.
Banking will only achieve probity when there is true accountability to the capital providers and the customers of banks. And they will only monitor banks properly when they are exposed to genuine risk of loss and there are genuine competitive alternatives. The “hair of the dog that bit you”(more regulation) isn’t going to help here, unless your goal is to restore the cosier-than-thou symbiosis of finance and the big state. Only the market can regulate something as large and important and complex as financial services. All else is hubris, delusion, and venality.
Andrew Lilico is chairman of Europe Economics.