The LIBOR scandal, banks, and Labour policy
The anticipation was high but the outcome instead left key questions unanswered. Bob Diamond probably benefited from testifying soon after the revelations about LIBOR fixing emerged. His interrogators had little time to prepare and, perhaps for some, to familiarise themselves with how inter-bank interest rates are set.
The full story of what happened to LIBOR interest rates, who was involved, and who knew what and when, has yet to emerge. So far the spotlight has only been on Barclays and the Treasury Committee has not been party to all the evidence held by the various regulators looking into the issue. On that basis we were probably never going to get a forensic examination. The relatively disjointed nature of the questioning did not help matters but MPs did not have a clear target to hit. Diamond was reticent about what severance package he would take. He referred questions on that subject to the Barclays board, though his reluctance to be forthcoming on this did not gain him any favours at the committee meeting.
Unfortunately we have heard relatively little about interest rate manipulation that took place in the years before the financial crisis. Instead, the focus has been on those dark days in 2008. The financial crisis is now five years old; we can sometimes forget that it began in 2007. Strains in markets led to a drop in confidence in banks and Northern Rock went under. The following year, the financial system was still under great pressure, with the fall of Lehman Brothers and the near-collapse of the system itself before banks such as Royal Bank of Scotland and Lloyds were bailed out by the government. We have learned that in 2008 a conversation took place between the Bank of England’s Paul Tucker and Diamond. So far we have only the latter’s account of the conversation, in which Barclays’ LIBOR submission was discussed. However, despite reports that we could expect a controversial revelation, Diamond told the committee that he was simply being warned there was a nationalisation risk to Barclays because people were concluding it was having difficulty borrowing.
Further investigations into LIBOR fixing are under way and it seems likely that other banks will be named soon. Many have had changes of leadership since, so their top people may not be so vulnerable. What further revelations may do is compound the deep sense that banks are institutionally incorrigible. They are very clever – at finding new ways to lose money. The LIBOR scandal suggests they simply cannot be trusted to run themselves well.
This goes to the heart of the debates about the City since the crisis began. If only the right people could be appointed to run the banks, it has been argued, they could set the overall ethical tone and ensure bad practice does not take root. This argument has also been used about the press, of course. The problem is that there is no guarantee and even if you could find a holy person to run a bank they would not be there forever and may not be able to impose their will on the organisation anyway.
That points, of course, to structural reform. It is here that most politicians have been behind the curve. From the outset of the financial crisis, a formal separation of banking activities should have been pursued, keeping retail banking apart from riskier activities. Certainly Labour should have pursued it. After all, we want power and wealth to be enjoyed by the many and not the few. There was some support – when the Christian Socialist Movement got behind an Early Day Motion on splitting banking in 2009-10 it attracted a good number of signatures (including from one Vince Cable MP). If Labour had adopted this policy it would have been making the political weather on finance for the past few years.
Structural reform is not only about putting in firebreaks against undemocratic accumulation of power; it is simply a good way to stop utility banking activities being put at risk by the more ‘casino’ end of the City. The Vickers report stopped short of a complete separation but did argue for ringfencing retail banking. The latest revelations about our banks should help ensure Vickers represents the minimum reform, though even now it is vulnerable to banking sector lobbying.
Some sort of larger-scale review of banking, and its relationship to the rest of society, does seem necessary. In the past, the case would have been made for a Royal Commission but a judicial inquiry of some sort might get to answers more quickly and provide an opportunity for catharsis. It might also remind us that banks, when they work well, provide essential services and employ thousands of decent people. Fundamental reform would help keep things that way. However, an independent inquiry is no substitute for original thinking within the Labour party itself. We were largely silent while the Vickers report was being written. We now need to be more positive and generate new ideas about how banking can be more accountable, how people can keep their money safe, and how businesses can have access to finance.
This article was first published on the Progress website on 5 July 2012
Progress, 5 July 2012, 06/07/2012