The Swiss bank UBS has agreed to pay fines totalling $1,5bn for their part in the LIBOR rigging scandal which really draws into focus the criticism of the banks and has increased pressure on the UK government to do more to regulate the bankers.
UBS has agreed to pay fines to regulators in the US, UK as well as the Swiss regulators for their role in manipulation of London Interbank Offer Rate (LIBOR). This rate has become the accepted benchmark rate for lending between banks in all the major economies, but it appears that the rate, rather than being set by accurate reporting of rates from banks has been manipulated by the major banks. Initially it was thought that this was just carried out by rogue bankers at Barclays, but it appears that was a far more wide spread activity and well known by all concerned – other than the regulators.
These fines only compound the problems for UBS who, along with most other banks has had to set aside funds for compensating customers who have been mis-sold products. UBS is particularly exposed in the US mortgage market.
The fact that UBS a Swiss based bank has been exposed as being culpable in these banking scandals must force some action for the better regulation of the banks.
Banking plays a far too important role in the economy to be seen as un-ethical, although the recent Which? report suggested that in the UK customers no longer trust their bank – but still bank with them. Banking ensures the flow of money around the economy, it provides high street banking for individuals and business, it also provides loans for house purchase, cash flow and capital expenditure. All of these are essential for the health of the economy, however the banks have pursued ‘super profits’ resulting in the ‘casino’ banking activities on the capital markets, the development of derivative markets to launder risk and the mis-selling of services to their customers. This cannot go on!
New for Old Models of Banking
There have been several new models of banking proposed most recently the concept of the separation of the high street business from what was always called the ‘Merchant Banking’ activity. This would separate the two parts of the business between the very low risk banking services and the high risk lending to governments and corporations, it would also allow government protection for banks to be limited to the essential high street and services activity. Bankers however say this could not work as it is only by taking the high risk activity they can offer the level of service to their customers – the division of the banks would end free banking. At a time when technology has changed the way that businesses work and the vast majority of banking is now carried out on-line I find this hard to believe. Surely new entrants could develop systems that would allow very low cost if not free banking.
Small Businesses have been one of the hardest hit sectors with newly risk averse bankers making business borrowing too expensive for most businesses despite repeated government initiatives. Lib Dems proposed that we should have a government bank for business an idea that was also considered by Blairs government, but always seems to end up in the parliamentary long grass. Again this idea would appear to be a ‘no brainer’ and I would support it – but it really has to be the last resort if we cannot make the banks operate ethically and in the interest of the UK not their shareholders.
This brings me to my final point. What has changed over the past 25years? I think the most significant change has been the demise of the mutual. A great many financial services started with the concept of mutuality, Lloyds Insurance, Building Societies and some of the major banks were formed to share the risk between their members. Over the last quarter of the 20th century the local building society and the mutual insurers all disappeared to create the shareholder society – but shareholder power is always held by the major players in the city, so being a shareholder is not the same as being a member of a mutual.
Can the mutual movement be rekindled – it took several hundred years to develop – so it is unlikely, so our best bet is government control and increased competition. Part of the failure of the regulation is the grip that the banks have over the business, mechanisms such as LIBOR are designed to limit access, it was the use of LIBOR that destroyed Northern Rock – an upstart that was stealing a very large share of the UK mortgage market from the banks. But with UK banking licences controlled access to the market is very difficult and even if you can set up you are confined to the systems controlled by the major players. The banking services offered by Sainsbury, Tesco and other retailers are little more than badged services from the banks such as the Royal Bank of Scotland.
It will be interesting to see how effective the UK Banking’s lobby is at retaining the status quo – or will we see the government forced to act. Action groups such as 38Degrees have already started trying to create pressure for change – but banking is a vast monster and although ailing is far from ready to lie down.