David Cameron has announced that a joint committee of MPs and peers will investigate the banking industry by the end of the year, in the wake of growing political anger at recent scandals.
Its remit will be to examine issues of “transparency, conflicts of interest and the culture and professional standards of the financial services industry including the interaction with the criminal law”.
The danger with a parliamentary inquiry including even one with a large number of experienced peers is that it descends into party politics, rather than becoming a serious evidence-gathering process.
But the government is genuinely concerned that a judicial inquiry will simply take too long, and miss the chance to inform the legislation implementing Vickers commission recommendations, as well as financial regulation legislation.
The scandals referred to (The Guardian):
What a week for greed, dishonesty and incompetence. Royal Bank of Scotland Group plc (NYSE:RBS) couldn’t serve its customers because its computers failed; Barclays PLC (NYSE:BCS) 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 Royal Bank of Scotland Group plc (NYSE:RBS), Barclays Plc (NYSE:BCS), Lloyds Banking Group PLC (LON:LLOY) (NYSE:LYG) and HSBC Holdings plc (NYSE:HBC) (LON:HSBA) – the UK’s big four – are compensating small businesses who were hoodwinked into buying complex insurance that they did not need.
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.
For one thing a major fine was slapped on Barclays PLC (NYSE:BCS) for rigging the LIBOR – of course they are manipulating. So much was clear a couple of years back in Denmark, when the Danish Central Bank (CB) flatly refused to collect data and register the local CIBOR rate – with the explanation that there was very little trade in that rate.
The object of the manipulation was to fix the CIBOR as high as possible as a large number of the banks’ loan agreements are fixed to the LIBOR or CIBOR: The interest rate can be set as CIBOR plus x percentage points. Of course banks cheat! What did you expect?
Now this development should be as unsurprising to both my regular readers, as a cholera epidemic in an African refugee camp.
The main point is the separation of detail banking from international, wholesale and investment banking. Besides unwinding the tangled web of banking, there is the purpose to eliminate the implicit guarantee of being a systematically vital bank:
Now it is considered bad form to quote oneself, but…
The serious investor should already at that point have taken their precautions.
What probably has happened is:
a) The German and the French made Cameron storm out of a meeting in connection with his flat refusal to agree to a Tobin-tax. The Tobin-tax was never really about raising a tax-revenue: It was to curb the dubious bank practices on the securities and derivative markets. When Greece flopped the gross positions of CDS was about 70 bio. EUR; but the net was 3-4 bio. EUR.
The real issue was a clear message to Cameron, that the British banks should stop messing with the EUR – or they would see to it that Britain was hurt. Now a similar situation comes up with Spain – with Italy put on hold for the time being. If you don’t think Jens Weidmann in Bundesbank and Draghi in the ECB can’t play the market as well as the semi-intelligent British bankers – then you are incredibly naive.
b) The Cameron outburst of temper was probably due to the extra homework he had gotten: Clean up your banking sector – or else….
In the month of June the British Government issued a White Paper on banking reform (as referred to above) with an incredibly tight time limit – and a content, beside the separation of detail banking – and thus the breakup of British banking, that could have been written by a first year student in a day – and probably was.
c) This has naturally caused determined resistance among British bankers – not to say self-pitying tears. But once again the Central Bank’s have been underestimated (that was the point of my oblique reference to the Danish CB)!
In their naivety the banks have quite overlooked the possibility of the chaps in at least some of the CB’s actually doing their job. They had hoped they would not have to specify the “or else …” – but alas: Just as some perpetrators hold on to their “rights” under a police interview and think that a prolonged stay in detention is an empty threat.
Of course the nasty threats can be backed up with chapter and verse! The problem was not what the bankers were thinking: The truth is that thinking is not the strong suit of a mob “enforcer”. It had entirely escaped the attention that the German tax-authorities bought stolen files from Swiss banks (and were temporarily arrested for spying in Switzerland).
d) Will the British banks play ball? Probably yes – and in time for the deadline of December – as originally planned by the White Paper (thus that deadline for replies).
Now Cameron wants a referendum about the EU – splendid; but if he thinks it is a threat he is about as wrong as a Greek president. The EU offers the UK a chance of surviving their banks. When will that man grow up?
Don’t say I didn’t warn you: When Schäuble banged his fist in the table everybody should have caught on to it. A German Finance Minister doesn’t throw a tantrum like that without a very good reason.