BANK FOLLY DAY Scandal, fines and questions in the House. Do our banks have a future?
AT 10PM last Monday, Bob Diamond still had a job despite the rate-rigging scandal that had engulfed his bank. Barclays had been under intense scrutiny since it had been fined £290million for its part in manipulating Libor, the interbank lending rate.
The former darling of the investment banking industry was confident he could weather the storm. He hoped the early retirement of chairman Marcus Agius earlier that day would appease investors, the public, regulators and politicians who were all looking for some form of retribution for the scandal.
Agius’s resignation was not seen as enough however. By early the next morning Diamond was gone as chief executive. Agius was back in as executive chairman, leading the hunt for Diamond’s replacement. The heat had simply got too much for Diamond to stay.
The Libor scandal has not just claimed the job of Diamond, once regarded as the most powerful banker in Britain. It has damaged the standing of the whole banking sector and sparked a political firestorm. The fallout is not over yet. Paul Tucker, deputy governor of the Bank of England, faces questions from the Treasury Select Committee tomorrow. Barclays chairman Agius will be interviewed on Tuesday.
There could also be criminal prosecutions. The Serious Fraud Office has opened an investigation into what went on when the key benchmark lending rate was manipulated. Libor, or London Interbank Offered Rate, is the interest rate banks charge each other for loans.
Barclays now faces a period of uncertainty as it looks for a new chief executive and its stock is placed on negative watch by ratings agencies. Meanwhile, the public has grown disillusioned with the bank and is looking for alternatives. Inquiries at new lenders are up.
With their reputation in the doldrums, where do the mainstream banks go from here? Diamond was the target of what has been called “a drive-by shooting” by the Bank of England, as well as the deep need for change within the Barclays boardroom in the wake of the scan- dal. A source close to the bank said of Diamond’s decision to go: “It was a number of factors. There was pressure from a lot of places. It is hard to know what was the individual straw that broke the camel’s back.”
A political storm had been raging for days after Diamond produced an explosive memo which turned a banking crisis into a potential political scandal. He wrote a contemporaneous note following a call from Bank of England deputy governor Mr Tucker who told Diamond he had received a number of calls from “senior figures” within Whitehall asking why Barclays’ rates were at the top end of Libor pricing.
During his marathon three-hour session in front of the Treasury Select Committee last Wednesday, Diamond was unclear whether these figures were ministers or officials.
The spotlight, however, soon fell on Shriti Vadera, Gordon Brown’s former economic adviser. Baroness Vadera had written a document at the height of the credit crunch in November 2008 called Reducing Libor. It argued reducing the rate would be a “major contribution to the stability of the banking system and the health of the economy”.
She insists the article is very different from market manipulation.
However, it was the Chancellor’s decision to throw down the gauntlet in a Spectator interview which really turned up the heat on Labour.
George Osborne said members of Gordon Brown’s Government were “clearly involved” in the Libor manipulation and had “questions to answer”. Shadow Chancellor Ed Balls claimed his integrity had been impugned and demanded a retraction from Osborne during a clash in the Commons last Thursday.
Osborne roared back that he would take no lectures on integrity from a man who had steered the British economy on to the rocks and smeared countless Brown enemies during New Labour’s reign.
Labour was claiming some sort of moral high ground in its demands for a judge-led inquiry into the Libor scandal while forgetting this all happened on its watch. On points, the Government has won the first round. Labour lost a Commons vote for a judge-led inquiry and instead the respected Andrew Tyrie will lead a parliamentary probe.
The belated decision by the SFO to investigate should appease public outrage. It spent days reviewing evidence gathered by the UK’s financial regulator in its civil probe of whether banks tried to rig Libor. The SFO can prosecute individuals for false accounting, fraud or theft.
Other banks could become embroiled. RBS, for example, is being investigated over what role it allegedly played in rigging Libor.
In the eyes of the public, the banking industry has a long way to go to win back trust. This has manifested itself as a surge in inquiries at other lenders. Metro Bank, Britain’s first new High Street bank in 150 years, has seen a 30 per cent rise in account opening inquiries due to the scandals that have dogged its rivals.
THE CO-OP and Nationwide have also reported a surge in interest. Another beneficiary is Funding Circle, a peer-to-peer lender that matches people with businesses looking for loans. Funding Circle has had a 70 per cent rise in loans listed in the last fortnight. Cofounder James Meekings says: “There has been a massive loss of trust in the banks. People want to take more control of their money.”
The mainstream lenders urgently need reform. This is most likely to be at the hand of the Vickers proposals which will see high street arms ring-fenced from riskier activities such as investment banking but these do not come in until 2019 and have been watered down. Ex-City minister Lord Myners said: “Restoring confidence in banking is critical to economic recovery as it is overshadowing all business decisions.”
Barclays faces a long-haul to restore its reputation. With Diamond’s departure it has started the process. A source close to the bank said: “Its not going to be business as usual, there’s got to be change. What was good enough before’s not now.”
The bank’s ability to bounce back must not be underestimated. It has fans among customers and the City. However, with trust at a low ebb, the banking industry has reached crisis point. The time is ripe for change. Let’s hope it recognises this.
OPINION: PAGE 36