One of the great curiosities of our time is why we have never had a full-blown inquiry into the causes of the Britain’s banking crisis.
Barely a day passes without the disclosure of some new outrage, be it misleading share trading in “dark pools” at Barclays or industrial-scale sanctions-busting at flagship French bank BNP Paribas.
This is not to say there has been any shortage of UK probes, ranging from the Vickers Commission, which recommended the ring-fence between retail and casino banking, to the Parliamentary Commission on Banking that came up with the new idea of an offence of “reckless banking”. Such inquiries, however, have been a knee-jerk response to political pressure rather than part of a broader-based effort to get at the historic truths behind the banking crisis and understand the lessons to be learned.
The poor behaviour of British and global banks since the financial crisis of 2007/2009 has been unrelenting.
Barclays is a bank that can trace its roots back to its Quaker founders in the 18th century, but its practice in recent times has been as far removed from those deeply traditional, puritanical roots as it is possible to travel.
Indeed, so out of touch has it been with acceptable behaviour that when the board was alerted to regulatory concerns in the spring of 2012 in the shape of a letter from Financial Services Authority chairman Lord (Adair) Turner, it failed to act to curb the excesses. Among the complaints was that the bank was engaging in aggressive tax avoidance for clients and had parked toxic securitised mortgage assets offshore in the Cayman Islands, thereby making its underlying balance sheet look stronger than if the assets had been retained.
In July 2012, after the emergence of the Libor scandal, Bank of England governor Lord (Mervyn) King called the then chairman Marcus Agius and the senior independent director Sir Michael Rake to Threadneedle Street to suggest it was time to part company with charismatic chief executive Bob Diamond. The two City grandees did not immediately appear to get the message.
In much the same way as the commercial banks felt able to ignore the regulators before the crisis, they seemed to think it was fine to do so afterwards. On this occasion they did eventually listen and parted company with Mr Diamond.
If anyone thought casting out Mr Diamond would bring an end to Barclays’ regulatory woes they were badly mistaken. The bank has come under scrutiny for alleged commission payments made to Middle East investors to secure new capital in the autumn of 2008. In addition to rigging the interest rate market it has also faced charges of fixing the gold bullion market, the Californian energy markets and the giant London-based foreign exchange market, and engaging in unscrupulous behaviour in “dark pool” share trading.
Among the reasons that poor standards have persisted in banking is that the reforms, such as they have been, are disjointed. In the seven years since Northern Rock failed at the start of the credit crunch the banks have been assiduous and effective at lobbying the Treasury and Whitehall as they were before the crisis began. The Bank of England itself had less access to Downing Street than former Barclays chairman John Varley, who in 2010 brokered a small business-lending deal with the Treasury that came to be known as Project Merlin.
There are some signs that in the summer of 2014 genuine change may be on the way. Sir Richard Lambert’s proposed Council on Banking Standards is one step in seeking to improve the ethical framework in which bankers operate. Barclays has just revealed it is creating a Compliance Career Academy for its army of 2000 or so internal enforcers and its top compliance official, Mike Roemer, has signed on the dotted line to do the course.
All of this is progress, but much of the rulemaking and regulation has been conceived without the evidence and casework to back it up. America’s unwieldy Dodd-Frank Wall Street Reform Act was largely based on evidence taken by the Financial Crisis Inquiry Commission that held public hearings involving all the major players and examined hundreds of thousands of pages of documents.
Contrast this with the snail’s pace of British probes. It is hard to credit, but the forensic report on the implosion of HBoS, that was folded into Lloyds at the height of the 2008 financial panic, is still months away from publication some six years after the event.
The report covers the emergence of Halifax and Bank of Scotland in 1998-2001 prior to the merger, the post-deal bank in 2001-2005 and the consequences of the forced marriage between Lloyds and HBoS. It will also look at the financial position, governance and culture of HBoS in the run-up to the crisis. Early versions of the report have been examined by independent reviewers Stuart Bernau of Nationwide, Iain Cornish, formerly of Yorkshire Building Society, and the late Treasury mandarin Sir Nicholas Monck.
It must also go through the process of “maxwellisation” where the main protagonists in this saga – former chair Lord Stevenson and former chief executives Sir James Crosby and Andy Hornby – have the chance to examine any critical passages. If the previous FSA report into the failings of the Royal Bank of Scotland provides a template, the HBoS study likely will be subjected to extensive legal scrutiny. In addition, Andrew Green QC will supervise a separate section of the document that will examine the role of the regulator the FSA, now superceded by the FCA.
The long wait for the HBoS inquiry report is in sharp contrast to similar studies produced in the past into the collapses of BCCI and Barings. The hopelessness of the process in many ways has delayed the repair and clean-up of Britain’s banking system. Taxpayers, shareholders and consumers need closure. As importantly, the haphazard approach to reform, spread among several banking acts and based on flimsy evidence, has made for poor public policy.
The politicians largely are to blame. Labour, under former prime minister Gordon Brown, feared that it would take the blame for light-touch regulation in the run-up to crisis. The Tories have been reluctant to be cast as the anti-banking party and have been concerned about killing the golden goose in the shape of income from the City. The post-crisis response has been a deeply flawed process reflecting the views of a political and financial establishment that has never fully come to terms with the greatest banking crisis for a century.
Alex Brummer is City editor of the Daily Mail. His book Bad Banks: Greed, Incompetence and the Next Global Crisis is published by Random House Business
Key points
Barely a day passes without the disclosure of some new outrage in the banking sector
Barclays is one bank that has been out of touch with acceptable behaviour
The forensic report on the implosion of HBoS, which was folded into Lloyds at the height of the 2008 financial panic, is still nowhere near publication some six years after the event
