Barclays Libor scandal: what should happen now

by Ed Bowsher on 28 June 2012  |  14 comments
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We need stable profitable banks that can boost the economy via lending. It's just possible that this latest scandal could help the UK reach that target more quickly.

The Barclays Libor scandal is truly shocking. One of the UK’s biggest businesses was consistently telling lies in order to manipulate interest rates and make big profits. And it seems Barclays wasn’t alone.  (If you don’t know what Libor is, read Euro crisis could make loans more expensive.)

So what should happen now? What can we do to stop future scandals?

1. Criminal charges

Fines aren’t enough. Dodgy City spivs will continue to take undue risks and break rules if the worst punishment they’ll suffer is a fine. The only way to scare people is to send some miscreants to prison.

2. Split retail and investment banking

Barclays is a big bank that does both retail and investment banking. 

The retail bank operates current accounts and other financial products for ordinary people. The retail bank also provides loans to businesses.

The investment bank operates in much riskier areas. It helps big companies raise cash from the stock market, helps companies buy other businesses, and most importantly, makes money from trading risky financial instruments.

Before the crisis, investment banking was much more profitable than retail banking, but in recent years we’ve learned that investment banking is also much more dangerous.

The big problem is that investment banks can take big risks and run up massive losses, and when this happens, the retail divisions are dragged down. In the end, the retail banks become damaged by their investment banking divisions. This isn’t the only reason that retail banks are struggling, but it’s an important reason nonetheless.

3. We need stable, profitable banks

Unpopular as banks are, we desperately need profitable, successful retail banks.

A major cause of our current economic problems is that the banks aren’t lending enough to businesses and individuals. That’s because they don’t have enough capital. 

The only way the banks can improve their balance sheets is to make consistent, strong profits for a long period. The banks also need a long period of prudent stability.

I think it’s going to be very hard to achieve that goal of stable, profitable banks unless we split retail and investment banking. We also need a clearout of top management – certainly at Barclays, possibly elsewhere.

Then we’ll have to do the really tough bit. We’ll need to accept that retail banks do need to make decent profits if they’re to boost our economy once again.

The one good thing about this Barclays debacle is that it increases the chances of a proper split between retail and investment banking, and it could also speed up the process of changing the culture and management at the big banks.

Then the retail banks can return to what they should be. Prudent but successful businesses that are helping the economy to grow.

More on banking:

NatWest system problems hit millions

NatWest and RBS problems: what to do if you have been affected

Punish NatWest by switching your current account