This has been another momentous week in banking with several announcements from regulators and legislators
EU ministers agreed the outline of a plan for a European Banking Union, reports surfaced of a potential $1bn settlement over Libor rigging by Swiss bank UBS (doubling the previous record for such a penalty), and a joint US-UK plan for dealing with failing cross-border institutions was the unveiled. Then came another scandal, this time in the form of non-payment of compensation to the owners of small businesses allegedly mis-sold derivatives.
In more normal times these events would have rocked the City individually. But combined they should have had a seismic effect. And yet, perhaps the most amazing thing about this week is how little amazement there has been. While each event has been commented on as an interesting development, the Square Mile is hardly reeling (other than from the fizz of another pre-Christmas party). The once conservative heart of London has become immune to change, shake-ups and shock. When one of the world’s biggest banks is fined for money laundering it should be shocking.
When two major banks get hit with such a claim in a single year, it should send shock waves around the world.
But then these are clearly not ordinary times for banks anywhere. The financial system suffered a calamitous near-death experience in 2008 but in the immediate aftermath there was a feeling that the City had got away lightly, that ordinary taxpayers had bailed out the banks only for them to turn back to their old ways and carry on regardless. Imposing taxes on bonuses and excessive pay didn’t seem to have much effect, especially in the popular imagination. Banker bashing remained a popular pub sport.
The once conservative heart of London has become immune to change, shake-ups and shock
This year has seen a number of roosting chickens back in the financial coop and stirring things up. Of these the most notable was the announcement in the summer that Barclays had settled over accusations of Libor rigging. Until this week (when nes of the potential UBS settlement broke) the £500m fine was a record. In the ensuing scandal the bank lost both its old-school chairman Marcus Agius and its flash, brash investment banker CEO Bob Diamond. That Diamond’s replacement came from the less aggressive world of retail banking was seen as an auger of calmer times ahead and better things to come.
And while regulators were initially seen to have been slow to act, there is now a wider feeling that the measured response by many regulatory authorities was about right, they were right not to jump too quickly. Legislation made in haste rarely ends well. In a classic effective compromise if the banks moan that changes are too severe and the public feel not enough is being done, then there is at least a chance that the right balance has been struck.
And the banks are certainly complaining that they will suffer from these combined changes. Reform to capital requirements and broader European regulatory reforms have gained momentum to the extent that those on the receiving end of this change are muttering darkly of the cost implications for customers. And senior people at the major banks are seriously concerned about the combined effect on their business if they don’t start to pass on some of the extra cost of doing business.
But the nature of these reforms is that we won’t know if they have worked for some time. Indeed it won’t be until the next crisis that the systems put in place to prevent a further collapse will be tested. But if there is a lesson to be learned from changes made after huge failures in the wider corporate world it is that the same thing rarely goes wrong twice.
Cynics suggest that the chances are the next banking crisis will expose unidentified weaknesses in a class of complex investment product that hardly anyone has heard of outside of a small cabal of investment bankers.
It would be nice to think they are wrong and that we could move into a period of stability that allows banks to do more to help business owners and to build increased trust in their integrity. And yet without the development of this trust, it’s hard to see how the City or the wider economy will ever really recover.
Richard Cree is editor of economia
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