A black week for banking

The Libor scandal has starkly revealed cultural failures all the way up to the highest level of British banking

What a week for greed, dishonesty and incompetence. Royal Bank of Scotland couldn't serve its customers because its computers failed; Barclays was fined £290m for trying to manipulate the money markets; other banks will soon be confessing to the same sin and paying their own hefty fines. And now RBS, Barclays, Lloyds and HSBC – the UK's big four – are compensating small businesses who were hoodwinked into buying complex insurance that they did not need.

"What I hope is that everyone – everyone – understands that something went very wrong with the UK banking industry and we need to put it right," declared Sir Mervyn King, governor of the Bank of England, on Friday. At one level, this was a statement of the bleedin' obvious. But King also sounded like a headmaster casting off his frustrations. He seemed to be : you've been caught red-handed and your punishment will hurt.

The frustrations, perhaps, are born of banks' and bankers' successes in the past four years in protecting their power bases and privileges. In the face of regulators' demands to preserve capital, the high-pay culture has survived. Bob Diamond at Barclays collected £17m last year, an astonishing sum given that the board will have known that the Libor skeleton was in the cupboard and Diamond himself had described the bank's financial results as unacceptable.

Meanwhile, the debate on structural reform of the industry was overrun by barely disguised threats. Don't push us too hard, the banks warned the politicians, because we are your best hope of reviving the economy. It's a line that looks outrageous in light of the mis-selling revelations.

To their credit, the commissioners on the Vickers inquiry proposed stronger reforms than seemed likely. The key proposal is that banks should construct a fence between their investment banking activities and their basic retail operations. King called for parliament to implement all the Vickers proposals as soon as possible"leadership of an unusually high order", even if he declined to name those leaders who fall short of this standard (not the time or the place, he pleaded).

But it is the cultural and leadership failings that the Libor scandal has revealed so starkly. What the Barclays case showed was how a cultural cancer can spread within a bank and an industry. The scandal had two stages. In the first, traders cajoled their in-house colleagues to submit false data on the bank's cost of borrowing to bolster their own positions. In the second stage, "senior management" – not named in the Financial Services Authority report – wanted submissions to be distorted to present to the outside world a more flattering picture of Barclays' financial health during the credit crisis.

Diamond, in his letter to Andrew Tyrie, chairman of the Treasury select committee, implied that the latter scam was commonplace. "At the time, Barclays' opinion was that those other banks' submissions were too low given market circumstances," he wrote. In other words, Diamond is saying that up to 20 banks were lying. That's no defence but it's an extraordinary claim, and it's odds on it will turn out to be well founded.

Is this the point where the scales fall from politicians' eyes? Maybe, if only because their careers are now so closely tied to the job of cleaning up banking.

About £100bn of public money will soon be poured into the banks via the chancellor's "funding for lending" scheme. From now on, scams, fiddles and bad behaviour could rebound directly on the government.

No wonder the prime minister sounds so keen for Diamond to go: if David Cameron can't force the resignation of the boss of a bank that has been shamed, a government-sponsored cultural revolution in banking looks a non-starter.


Nils Pratley

The GuardianTramp

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