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Last week saw arguably the most turbulent time for banks since the financial crisis hit. The blame for the financial crisis, which has lasted since 2008, has rested squarely on the shoulders of the bankers; yet most will agree that we all lived beyond our means, and must take some responsibility ourselves. However, what last week illustrated is that the banks, in which we began to trust again, are wholly lacking in integrity.

 

It started with the ‘deceitful manipulation’ of the interbank interest rate (Libor) and Euro interbank interest rate (Euribor) between 2005 and 2009. It has led to the mis-selling of specialist insurance that was meant to protect businesses against rising interest rates. Something has gone ‘very wrong’ with banking culture, and this needs to change.
We all know that banks are private institutions, which are run for profit, yet reasonably expect them to uphold certain moral values, such as remaining honest. What the trusting borrowers believed they were getting involved in was the protection against rising interest rates. What actually happened was that the banks failed to clarify what these hedges meant, failed to check if the customer understood the agreements and, fundamentally, the whole situation has reflected an ethos of selling for private gain rather than what the businesses needed. There has been the intended mis-selling of complex loans such as ‘Interest Rate Savings Agreements’, ‘Collars’ and ‘Caps and floors’ in order to hedge funds. When the interest rates fell to record lows after the recession hit, a large amount of businesses found themselves with massive debt payments, many of which cannot be afforded.

 

Compensation is now being offered for the estimated 28,000 products that have been mis-sold by the four major banks (RBS, Barclays, Lloyds Tsb and HSBC). The Barclays chairman, Marcus Agius, has also stepped down with each of the Chief Executives refusing to take their respective bonuses. This will appear to most of us, however, as merely a way to escape the content surrounding them. It will also strike most of us as too little too late: the banks may well compensate those who have been injured by their actions, but the unjust behaviour and greed driven intentions were there all the same.

 

Bob Diamond, Chief executive of Barclays, has finally resigned today. Given that Barclays has been fined £290mn, indicating the scale of deceit, one MP was ‘amazed’ at how unaware Diamond claims to have been. Even if he was not directly involved, his gross negligence of immoral behaviour within a bank for which he is paid an enormous salary to run must entail punishment. His letter to Barclays’ staff seems to be a mere way to appease public and media outrage, but does not unshackle him from his responsibility. In fact, George Osborne, Chancellor, claims that this is the ‘first step towards a new culture of responsibility’.

 

Mervyn King, Governor of the Bank of England, has argued that whilst banking culture needs to change, an inquiry is not necessary. Labour leader Ed Miliband, conversely, insists that there must be a Vickers style inquiry. Our Prime Minister appears to agree with the opposition leader, stating that the events that have unraveled have been so serious that there will be a banking inquiry, including possible criminal prosecutions. Cameron states that the review ought to guarantee that the UK has the “toughest and most transparent rules of any major financial sector”. On the other hand, Andrew Bailey, Executive Director and Head of the Prudential Business Unit at the Bank of England, believes that the rebuilding of trust should be left with the bank boards.

 

This appears a weak argument. Some blame must be placed on the regulators, and, in particular, the Financial Services Authority (FSA). We do not expect banks to act in the way in which they have, but our anger at them does not, at this stage, equate to surprise. The regulatory failure does come as a surprise and must be addressed if we want our banking industry to work effectively. Ultimately, if our regulators had acted faster many people would have been saved and the banks punished sooner. One long-term solution to these problems is attracting the best and brightest in to the regulatory bodies. At current, the top minds are attracted to medicine or bank trading floors, for example. A change in the current culture should have aspects of this long-term concern incorporated.

 

Sir Roger Carr, president of the employers’ body at CBI, has pointed to how the integrity of the city has been undermined and called for the punishment of culprits. The banks have acted deplorably and our own regulators seem to have let it happen under their noses. All of those involved must answer for what has happened, and we must hope that the enquiry goes far enough.

 

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