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Barclays Libor scandal: what should happen now

Ed Bowsher
by Lovemoney Staff Ed Bowsher on 28 June 2012  |  Comments 14 comments

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.

Barclays Libor scandal: what should happen now

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.

The obvious solution to this problem is to split retail banks from investment banks, but big banks such as Barclays have so far successfully resisted calls for splits. I think this week’s news shows that governments and regulators should have the courage to face the City down and push through crucial changes.

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 

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Comments (14)

  • electricblue
    Love rating 643
    electricblue said

    I think if they resorted to hanging bankers right now, Ed would be rushing in with his rope ready. In twenty years time he'll be in the corner of the pub over a few pints telling everyone about the terrible banking crisis.......'We strung 'em all up, you know......'

    Report on 28 June 2012  |  Love thisLove  0 loves
  • spider589
    Love rating 4
    spider589 said

    What a shock to discover that the filthy rich occasionally slip into practices not entirely becoming of the aspirations of their organisations! Do you think this is a one-off?

    Report on 28 June 2012  |  Love thisLove  0 loves
  • fenemore
    Love rating 205
    fenemore said

    It is all very well saying we need profitable Banks - but we need to remember that investment banking is not described as "casino banking" for nothing. Every £1 profit made by a bank is someone else's loss (probably another bank's) - just as in a casino. They cannot ALL be winners.

    We need to get away from short-term investing and instant gratification. There was a time when banks invested ethically and on a sound basis in the hope of making a modest profit in the longer term - and would be content at making a tad over the base rate. I doubt the current mob in the city would even recognise this scenario.

    It is all about making as much as possible in the shortest time possible - and to hell with the consequences for the rest of us. This level of bonuses in the City actively encourage this behaviour - and it will continue until there is a radical rethink on Traders' remunerations. As it is - is it even possible that Traders act in their Bank's best interest before their own? I think we all know the answer.

    Report on 28 June 2012  |  Love thisLove  0 loves
  • Wings
    Love rating 0
    Wings said

    Sorry for dumb question guys - If LIBOR rate rises doesn't mortgae rate rise - if so shouldnt barclays (et al) be compensating those mortgage owners for the periods where the rate was artificially hiked??

    Report on 28 June 2012  |  Love thisLove  0 loves
  • JOHN MAXWELL
    Love rating 56
    JOHN MAXWELL said

    i have looked into my crystal ball and i see Bob Diamond resigning, or being dismissed from, his position as the head of Barclays Bank - i then see Bob Diamond in a highly paid position with another organisation. i also see Mr Diamond wearing his ''old boys club'' badge. the only flaw in my crystal ball is that it is doubtful as to whether Mr Diamond will resign or be dismissed.

    Report on 28 June 2012  |  Love thisLove  0 loves
  • Charliebob2000
    Love rating 3
    Charliebob2000 said

    Apparently nobody has actually broken the law (because as I understand it, there isn't one regarding the manipulation of the libor rate). If section managers, SEOs and CEOs actually faced criminal charges (as they have in th US) then maybe things would change a little, but probably only a little.

    I seriously doubt that we will see Bob Diamond falling on his sword, a few small players with their e-mail prints all over this will go, but that's probably about it. Money has never had any morals, and the modern financial market place certainly has no place for them. I see no real change on the horizon ....

    The great shame for me, is that for years I saw the banks as a place to go for reliable help and support. I'm sure there was a time when banks actually had their customers best interests at heart. But today, well, they're all just a bunch of two faced, double dealing, money grabbing *ankers, who lost most of OUR money, and now expect US to replace it.

    Report on 28 June 2012  |  Love thisLove  0 loves
  • wafu
    Love rating 12
    wafu said

    All h ear about is fines for the banks and what should happen in the future. Where is the compensation for the borrowers e.g. the mortgage payers on Libor who have seen the rate continually rise over the last12 months when the B of E rate has been unchanged

    Report on 28 June 2012  |  Love thisLove  1 love
  • johnhp
    Love rating 1
    johnhp said

    wafu,

    affecting Libor is unlikely to have affected your mortgage unless you have a short-term mortgage 'Only certain mortgages are directly linked to Libor but the rate does have an impact on the pricing of new short-term mortgages, such as two-year trackers, as lenders borrow against Libor, not base rate' -

    Do you have a 2Yr mortgage?

    Report on 28 June 2012  |  Love thisLove  0 loves
  • Mike10613
    Love rating 599
    Mike10613 said

    The system is corrupt. They prosecuted Al Capone on tax evasion because they couldn't prove anything else. When people wear Prada, drive expensive cars, swan around at Wimbledon and Royal Ascot in their fancy hats, they have to be getting the money from somewhere. If they aren't paying tax, it follows they are on the fiddle. Half of London is on the fiddle and it's time to call a halt to those bigger fiddles, whether it be by bankers or MP's fiddling their expenses. Bank executives give themselves bonuses based on false accounting and fiddles. They churn out propaganda to cover up their corrupt activities, but they are there to see, for those who can look beyond the pomp and circumstance. See the colossal amounts of money being spent on the BBC (10 billion), the Jubilee and the Olympics (at least 10 billion) and the brain washed idiots will go out and wave their flags in approval. Stop flag waving and start complaining!

    Report on 29 June 2012  |  Love thisLove  0 loves
  • 99point99
    Love rating 3
    99point99 said

    Put these fraudsters in jail. Simple.

    Report on 29 June 2012  |  Love thisLove  0 loves
  • spider589
    Love rating 4
    spider589 said

    I detect the complicity in the media of the wool being pulled again! With a perfectly straight face, we are being told that we are assured that a very small number of people are involved in these practices, (one rogue reporter, anyone?) The procedure seems to be, only admit to what you know they know!

    Report on 29 June 2012  |  Love thisLove  0 loves
  • Ed Bowsher
    Love rating 79
    Ed Bowsher said

    Electricblue,

    I don't hate all bankers. I don't think they're all crooks. But some are. And what has happened at Barclays IS extraordinary and shocking.

    One of the points I'm making in this article is that we do need stable profitable banks in the future. So I'm not saying let's destroy all the banks.

    I just think that if we split retail and investment banks, we can get to the destination of having stable, profitable retail banks more quickly.

    Moving onto Libor and mortgages - Libor affects the rate on some mortgages, but not all. Variable rate, not fixed. And even then, not all variable mortgages.

    We're told that this scandal happened in the years leading up to 2008, so hopefully, we haven't had any Libor manipulation more recently. We'll see.

    It's important to note that the manipulation won't necessarily have increased Libor every time. On some occasions Barclays (and possibly others) will probably have driven Libor down. As long as the traders knew how Libor was going to move, they could make money. Direction doesn't matter to them.

    It's possible that senior staff may have had another motive to drive down Libor during the crisis. Back in 2008, rising Libor was a widely used measure of the credit crunch and how tight things were at that stage. The higher Libor went, the greater the crisis atmosphere, and the greater the risk to the likes of Barclays and RBS.

    So it's possible that Libor was manipulated in order to give the impression that some of the big banks were healthier than they actually were. But, as far as I know, there's no firm evidence showing that was the case.

    Ed

    Report on 29 June 2012  |  Love thisLove  0 loves
  • tuttogallo
    Love rating 75
    tuttogallo said

    A few suggestions:

    A new banking law, which criminalises the behaviours we do not wish to see repeated with stiff prison sentences. The banking lobby to be excluded from all discussions (but hired banking experts to be involved in drafting the new law).

    A code of practice to be signed by all bank employees and directors. This should promulgate a new culture based on the best of the old (my word is my bond) and new.

    No new bureaucrats to run the new system (and especially not civil servants with gold plated pensions).

    Bonuses should be deferred by 5 to ten years and calculated on the outcome at the end of the period for the financial products which were worked on.

    Any practices which are clearly wrong should be made illegal. Example when Marconi was going down, it was not restructured because some of the decision makers held credit default swaps which only paid out on an actual default. Imagine this: your house catches fire, but 5 other people have fire insurance on your house. They stop the fire brigade from acting. That would not be allowed. Modern "banking" is riddled with this kind of stupidity.

    Report on 30 June 2012  |  Love thisLove  0 loves
  • jegwe
    Love rating 20
    jegwe said

    The government may be right in claiming that it is not their fault that this happened, but they now have a responsibility to ensure that the fines are paid by the banks and that they are not allowed to find ways of passing them on their customers.

    Report on 02 July 2012  |  Love thisLove  0 loves

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