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BOB Diamond's gift to the UK, perhaps a parting one, is that
he has managed his bank badly enough to provoke real reform but, perhaps out of
luck, not so badly as to blow up the whole economy.
That Diamond should go is obvious; that he hasn't is further
evidence of why he should.
Not that Diamond, the CEO of Barclays, has made the case for
root and branch reform all on his own. (Editor's note: Diamond resigned with
immediate effect shortly after this article was written.)
While Barclays has been heavily fined in the UK and US for
submitting fictitious borrowing rates to the key Libor and Euribor panels, it
is very likely that it was not alone, either in masking its weakness during the
height of the crisis or in manipulating figures for gain in good times.
Nor was the bank alone in the further scandal of mis-selling
complex and destructive interest-rate swaps to small businesses, a plea it
copped along with HSBC, Lloyds Banking Group and Royal Bank of Scotland Group.
This represents a golden opportunity for the UK, a chance to
harness public outrage in the service of reform before its banking system, as
it very well may someday, causes a crisis too big for the state to handle.
Think on this: Barclays' balance sheet is about the size of
annual UK gross domestic product, and the balance sheet of the system of the
whole is several times that.
At the same time, as recently as the end of last year,
median UK bank leverage was still well above 20 times capital, meaning that a
typical bank might be rendered insolvent by a decline of less than 5% in the
value of its assets.
And don't be fooled by Britain's AAA rating, already on
review for downgrade by several ratings agencies. It, like Iceland, Ireland,
Greece and Spain before it, could find itself with a banking crisis it cannot
bankroll.
That, in combination with the ample evidence of bad
behaviour, bad management and misaligned incentives, makes UK banks a real
threat to the UK's future.
It is an injustice that the UK subsidises too-big-to-fail
banks, stifling competition and allowing a good proportion of that subsidy to
walk out the door in bonus payments. It is even worse that these banks are not
just too big to fail but too big for Britain.
Of course this is not simply a nasty side-effect of the
financial crisis, it is really the result of a strategy the UK pursued for
decades leading up to the crisis, making an enormous leveraged bet on
globalisation by allowing its industry to wither and concentrating on global
financial intermediation.
While this has worked out well for financial services
workers, it has helped to create the conditions leading to rather crushing
levels of household debt.
It also makes it that much harder for reform to get
political backing, though the Bank of England is at least making more radical
noises than their peers across the Atlantic.
Curse of self-regulation
The plague of Britain is gentlemanly self-regulation, which
has repeatedly proved a failure.
The very fact that a key rate of interest, used to compute
trillions in mortgages and to fix the value in still more in derivatives, was
in the hands of a trade association, and one which offered as its only sanction
for fraudulent submissions the risk of expulsion from the panel, is simply
amazing.
Libor should not be allowed to remain under the auspices of
the British Bankers Association, and the fact that major changes to its
calculation could theoretically invalidate billions in contracts only underscores
how untenable the current set-up is.
Even the cries of outrage from British regulators have a
kind of pleading tone to them:"Perhaps the reaction to the penalty imposed
last week on Barclays will be a watershed moment, the point when the industry
realises that it also has to rise to the challenge and to recognise that things
have to change," Tracey McDermott, acting head of enforcement at the
Financial Services Authority, said, maintaining that the solution was not
solely the job of regulators.
It goes against all the evidence to hope that banking will
realise that it must change. The watershed instead will come when people in
politics, in regulation and in everyday life realise that it is up to them to
impose change on the industry.
This will impose real costs on the UK, but they are likely
to be lower and easier to plan for and bear than those of a catastrophic
banking crisis in 10, two or one years.
For that realisation, which may just have come in Britain, and for helping us to come to it without actually destroying too much of the economy, we owe Mr Diamond an ironic kind of thanks.
- Reuters
* James Saft is a Reuters columnist. The opinions expressed are his own.
