Following the scandals this week involving Libor fixing and the miss-selling of complex interest rate swaps to small business the TUC this morning called for a Leveson style public inquiry into the behaviour and practices of the banks and the wider financial sector.
It’s been nearly 5 years since the failure of Northern Rock and almost 4 years since a crisis in the financial sector caused the deepest recession since the 1930s and yet many of the practices that led to the crash still seem to be carrying on.
The Libor fixing scandal goes to the heart of the financial system and almost certainly will draw in banks other than Barclays. As FT Alphaville have noted trillions of pounds of contracts use Libor as their reference rate.
The latest miss-selling scandal could affect up to 28,000 UK small businesses.
The earlier PPI scandal was so wide ranging that the OBR identified PPI compensation payments as a driver of UK consumption!
Compared to our November forecast, we have revised income growth in these two years mainly due to the effects of payment protection insurance (PPI) fee repayments. It seems likely that the majority of these repayments will be made in 2012 and will provide some short-term support to household consumption growth.
And aside from miss-selling and outright fraud, the TUC has long argued that the banks have failed in their task of supporting the wider economy.
In the past two weeks RBS has failed in the most basic of banking functions – providing a timely payments system for individuals and businesses.
This has all come against a back drop of continuing excessive remuneration in the sector and a bonus-as-usual-culture.
A few top bankers giving up one year’s bonus isn’t, and can’t be, the answer.
So why a Leveson style public inquiry? Haven’t we already had the Independent Commission into banking chaired by John Vickers?
The Vickers Commission did some valuable work but its terms of reference were highly specific:
The Independent Commission on Banking will consider the structure of the UK banking sector, and look at structural and non-structural measures to reform the banking system and promote competition. It will formulate policy recommendations with a view to:
- Reducing systemic risk in the banking sector, exploring the risk posed by banks of different size, scale and function;
- Mitigating moral hazard in the banking system;
- Reducing both the likelihood and impact of firm failure; and
- Promoting competition in both retail and investment banking with a view to ensuring that the needs of banks’ customers and clients are efficiently served, and in particular considering the extent to which large banks gain competitive advantage from being perceived as too big to fail.
All of this is worthy stuff (and even these recommendations won’t be implemented for the better part of a decade) - but it didn’t focus on some other crucial areas – how banks support the economy, the prevalence of actual criminal practices, the types of products the banks sell, the culture of excessive remuneration. This is what a more wide ranging inquiry could consider.
What has been striking about Leveson has been the steady drip of revelations – things that would not be in the public domain without a judge and a barrister asking people questions under oath in the full glare of the public.
We know we need a different kind of financial system – but designing that system would be an awful lot easier once we know the full extent of what’s going on at the moment and what led up to the crisis.
The US has, to an extent, all ready done this. The Financial Crisis Inquiry Commission heard from bankers, the ratings agencies, regulators, central bankers, journalists, politicians, fund managers, traders and others. Outside of some excellent work by the Treasury Select Committee, the Uk has had nothing comparable in scale, remit or resources.
To those who argue that this would cost a lot of money, one way of paying for it would be earmark some of the £60mn that the FSA has just fined Barclays. I rather suspect more fines like that will emerge in the coming weeks.
London is getting a bad reputation internationally. Just last week US Congresswomen Carolyn Maloney, noting that JP Morgan’s latest trading disaster had occurred in London noted:
“Every big trading disaster happens in London. I would like to know why. It is a pattern.”"
We need a banking and financial system that supports growth, that is safe, that doesn’t cost the taxpayer money and that isn’t accompanied by a bonus-culture completely out of line with the experience of the rest of the economy. An inquiry could be a helpful step in the right direction – identify what the issues are, making sure that our regulators are on top of current practices and helping us to design a better system all around.