Two news items from the City of London; neither of them good.
Lloyds Bank last week fired eight employees for their part in the manipulation of London’s benchmark interest rate (LIBOR), and forced them to forfeit £3 million in bonuses.
And three British banks – Barclays, RBS and HSBC - were among six banks negotiating with the regulators in the Financial Conduct Authority to agree the fines they will pay for fixing the foreign exchange market (Forex). Bargaining started at £1.6 billion.
In February, after Barclays was fined £26 million when one of its traders was caught manipulating the gold market at the expense of a client, a chorus of claims that price-manipulation in the London Gold Fixing has been routine.
City bankers are to a man evangelists for free capitalist markets, but their traders have corrupted at least three of them. All to boost the profits, and the bonuses. Chris Blackhurst in The Independent, remarks that these cases expose “a deep underlying culture of arrogance and contempt for pretty much everyone but themselves”. You can’t argue.
Yet there is some evidence that, after years of denial, something is now being done about this tradition of institutional larceny. For example, new rules from January 2015 will make it possible for banks to claw back bonuses from wrongdoers even if they have pocketed the money.
City propagandists still murmur about attacks on their practices, suggesting that these undermine the international competitiveness of the City of London. After years of letting them get away with this argument, the Bank of England and the Treasury have run out of patience. Their language indicates the change of mood. Mark Carney, Governor of the Bank, described the Lloyds affair, as “highly reprehensible, clearly unlawful [that] may amount to criminal conduct”. For the Bank Governor, that is tough talk.
A second line of attack is huge fines levied on City banks by regulators in the US and the UK, which are starting to impact on their balance sheets. For example, the Royal Bank of Scotland (80 per cent owned by the British taxpayer) has already paid out £5.9 billion for mis-selling personal insurance, interest-rate swaps and mortgage backed securities, for its role in rigging LIBOR and in money-laundering. RBS has set aside an additional £1.9 billion for further fines for its sale of mortgage-backed securities and its part in the Forex scandal. The total rises towards the astonishing sum of £10 billion.
Other banks, such as Bank of America, JP Morgan and Barclays have paid out even more. Morgan Stanley estimates that the grand total of all fines levied on all banks so far is $210 billion, with a further $75 billion due in the next three years. The consequences are only now starting to add up. Andrew Bailey, deputy governor of the Bank of England in charge of prudential regulation, says: “I am trying to build capital in firms, and it is draining out the other sides in fines and penalties.”
Bailey worries that “fine inflation” in the US might begin to undermine financial stability, especially if other regulators are tempted to “improve on” the $8.9 billion penalty imposed on BNP-Paribas by federal prosecutors for ignoring US sanctions directives. At HSBC, the chairman Douglas Flint observes a growing danger of disproportionate risk aversion. (His bank was fined $1.9 billion for money laundering.) The law of unintended consequences is now operational; the head of Nomura in Europe notes that poor African nations are finding their access to capital is becoming harder because of the size of the fines paid by banks in the City.
Fear and greed have always been the dominant emotions in the City’s markets. The greed has been abundantly rewarded. In 2013, RBS revealed that 95 of its bankers and traders were paid more than a million pounds a year, though not all of them work in the City. Over at HSBC, 204 were on a million or more. Barclays topped the league with 420 on a million plus.
The fear-factor has counted for nothing. Banks simply paid up when they were fined and the perpetrators of their misdemeanours stayed put. The sacking of Libor fixers - six from RBS, five from Barclays as well as their eight from Lloyds - marks a significant sea change. London’s Special Fraud office has also already accused 12 traders of rigging LIBOR. While it is true that no-one has yet been tried and convicted, the Libor scandal might be the first to end with traders behind bars.
But the damage to the reputation of the banking industry has gone too far to be undone. Businesses are now skirting the traditional banking system and using alternative credit markets. Harder to detect long-term are the social consequences, but they too are taking shape in London. The radiant self-confidence that followed the Olympics in 2012 is starting to dissipate. The principal reason is the growing gulf between rich and poor, and no group accumulates wealth fast more successfully than City bankers. Look no further than London house prices.
For a generation, the City of London has behaved as though it were London’s off-shore island where the rules and sentiments of civilised behaviour have been forgotten. It is time banks and bankers decided to rejoin the rest of us.