Monday, July 2, 2012

Can people trust banks management?

Banking has a core role in the economic crisis under way. Last weeks banks have been at the center of news. Bailouts of banks in Spain and Italy were at the center of discussions and decision during last EU council. But UK added two very important contributions to the crisis.
NatWest fiasco (see here, and here, as well as here) is a significant operational case about what can happen when real time information systems go wilde. It is a case that will prompt a lot of discussion and analysis in the future.
Meanwhile the UK Libor scandal has the promise of wider implications, both in banking and politics. It is a case of business culture and management of values in the corporate world - an upper level relative to NatWest operational fiasco.  Martin Wolf posts some very critical comments about the present perversion of banking in his FT blog:
  • My interpretation of the Libor scandal is the obvious one: banks, as presently constituted and managed, cannot be trusted to perform any publicly important function, against the perceived interests of their staff. Today’s banks represent the incarnation of profit-seeking behaviour taken to its logical limits, in which the only question asked by senior staff is not what is their duty or their responsibility, but what can they get away with.
  • Finally, does anybody really believe that the fundamental model of contemporary banking, which is to operate with the barest minimum of capital, with a view to maximising expected non-risk-adjusted returns on equity, for the benefit of bankers’ remuneration, at the expense of both shareholders and taxpayers, is defensible?
  • A full retail ring-fence, which separates the investment banking from the retail banking, plus much higher capital requirements, would be a good start. This combination would, I believe, see the disappearance of much unnecessary trading activity. Good riddance, I would say. But the UK would also have to accept that the present charging model for retail banking – free, if in credit – is also one of the reasons for the endless series of scandals. The model is broken, in the current low-interest rate environment. Banks must be encouraged to charge open fees for service, rather than make money by covert means.
There is a pending question: is it a UK only phenomena? What about manipulation of basic rates in other countries? France and Germany: are they fully innocent? We would appreciate to know. We guess next episodes are not to be very pleasant.
Of course, this post is very much related to our previous one.

(Italics our responsability)

(Update, 5 July: article in The Economist, "The LIBOR affair: banksters":

  • If attempts to manipulate LIBOR were successful—and the regulators think that Barclays did manage it, on occasion—then this would be the biggest securities fraud in history, affecting investors and borrowers around the world.)

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