Banking Crisis

26th September 2012

This week Royal Bank of Scotland's Chief Executive Stephen Hester said the banking industry had to "accept that society has a different attitude and determination to make sure that banks behave in a different way and improve their reputation."

Quite the turnaround when compared with Barclays' Bob Diamond's words in June last year.

He told MPs that banks have made amends for their past excesses and should be left alone to "take risks" and make profits, which they certainly did. Meanwhile, he rejected repeated calls to limit bonuses paid to his staff.

"There was a period of remorse and apology for banks. I think that period needs to be over," he firmly said.

The turning tide

Then came the libor rate-rigging scandal – the trigger for current humility.

Hester said in a speech at the Bank of America Merrill Lynch annual banking conference in London on Tuesday: "We have to all deal with the issues of the past and try and reduce the chance of them recurring and that will take a long time and, sadly, a lot of money as well in terms of past restitution."

He warned that part-nationalised banks faces hefty penalties for rectifying past misconduct and said the overall cost of dealing with the issues was impossible to forecast.

Reuters reported in August that RBS, which is 82% owned by the government, was closing in on a settlement in relation to alleged interest rate manipulation.

During a tempestuous period that has seen no major banking institution free from scandal and fines, banks are finally waking up and smelling the coffee.

Perhaps, even, no bank risk committee at the relevant times considered the possibility that a bank could incur a serious reputational and financial cost arising from the manipulation of Libor. Even less that the chief executive of Barclays might be forced to fall on his sword as a result of misbehaviour.

There have been serious failures of risk management and control.

But do these sudden words of wisdom signal change?

Ken Eisold, psychologist and Mindful Money blogger, comments: "It strikes me that none of the statements – then or now – speak of the need for, or the benefits of, new regulations or oversight. For them it's just a question of having to accept change — or not."

And the industry continues to struggle to atone for its sins.

Last month consumer group Which? found that over eight in 10 people think that banks have not done enough to change the banking industry to prevent another credit crunch from happening.

Meanwhile seven in ten people say that the banking "culture" hasn't got any better since 2007.

Which? found that far from improving, trust in banks has deteriorated significantly over the last year. In fact, there remains a "broken culture" in the banking industry.

Eight out of ten of the 2,000 adults surveyed said that there is a deeper problem with the culture in banks than just a few individuals making bad decisions.

So will the parliamentary banking inquiry provide solutions?

The parliamentary banking inquiry must produce proposals for fundamental change to the culture and practices of the banks and put the best interests of consumers back at the centre of reforms.

And Which? is calling on the inquiry and government to listen to the public and make sure consumers' best interests are put at the heart of the reforms.

Lead member of the commission, Pat McFadden MP, said: ‘Recent scandals show serious problems have developed in the relationship between banks and their customers. This panel will try to find out what lies behind this and how it might be addressed.'

Certainly, nothing should be off the table if the Government is to rebuild consumer confidence in this essential service when it comes to bonus culture and regulatory reform.

The bonus culture doesn't appear to have shifted as it should.

As Mindful Money stated here, pay at banks has risen faster than returns to shareholders. So those who put money into the business to allow it to grow are seeing their potential return diluted as those within the banks award themselves a larger portion of the profits.

But while we wait to see if it's all talk and no action, the banking world has been rocked to the core, and it should use this opportunity to bring back the ethics that have been missing since long before crisis hit.

 

More on Mindful Money:

Can we criticise banker pay?

Confessions of a banker

Banking connections – the more there are, the greater the risks

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