July 3, 2012 7:15 pm

Restoring trust after Diamond

Bob Diamond has finally been induced to resign as chief executive of Barclays. He has belatedly acknowledged that, far from being an indispensable leader, his continued presence at the helm of one of Britain’s most important banks was a damaging distraction.

Whatever he may or may not have known about the Libor scandal, the manipulation of rates took place on his watch. His attempt to pass the buck to the Bank of England and his own chairman were unworthy of a man who aspired to lead by example.

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Editorial

Mr Diamond’s departure clears the way for a wider rethink about the purpose and structure of Britain’s supersized financial system. As the boss of one of the few UK banks that avoided taking a direct capital injection from the state, he was very forceful in defending the old model of light regulation and universal banking. It was his conviction that bankers should stop apologising and return to pre-crunch “business as usual”.

This pre-crisis model was already looking tawdry; now, in the wake of the Libor scandal, it looks even more tattered. The harsh lesson is that banks cannot be trusted to perform any public function if it conflicts with their own interests. Barclays staff rigged an interest rate used to price the financial products they sold to customers with a view to ensuring their own derivative bets paid off. It is hard to think of anything more corrosive of trust in finance – and indeed in capitalism itself.

There are more questions that need to be answered about the scandal. Why were bankers given so much freedom to abuse the system? Why were the regulators not more alert, and did they (as Barclays suggests) condone some of the Libor fiddling at the height of the crisis when watchdogs and politicians were rightly alarmed about the frailty of large banks?

MPs need to grill Mr Diamond when he appears before them on Wednesday. The case for another monster judge-led public inquiry along the lines of Leveson is, however, far from clear. A swifter and cleaner way to establish the facts would be for an independent and eminent figure to do so, as was the case with Lord Woolf’s report into bribery allegations involving BAE Systems. Barclays should take this step without delay.

Nevertheless, it would be wrong to assume that Barclays was alone in behaving badly. Another 20 banks are embroiled in the Libor- fixing investigation. This is not a case of a single rotten apple in an otherwise healthy orchard.

The reputation of banking in Britain matters. The City of London is a national asset, a global hub that provides billions of pounds in tax revenues for the rest of the country. The misconduct of a few big banks should not be allowed to put this prize at risk.

The priority must be to restore trust in finance, not through an expensive, time-consuming inquiry but through carrying out policies that the government has already stated it favours. A major part of the answer must be to separate the investment and retail parts of universal banks. This would not only deal with the financial risks and conflicts, it would address the deeper problem of culture that Mr Diamond embodied.

The clash between retail and investment banking has always been evident. What is now clear, however, is that the hard-charging, revenue-seeking investment banking culture predominates when they are pushed together. The more herbivorous retail banking ethos – with its emphasis on patient stewardship – is marginalised. This seems to lead ineluctably to the proliferation of socially questionable trading activities and abuses such as the Libor scandal.

The government accepted the principle of separation last year when it endorsed the conclusions of the banking commission presided over by Sir John Vickers. This argued for an internal split rather than a total separation on the basis that the diversity of assets within a universal bank could be a source of strength at times of financial stress.

While the FT supported those conclusions, we are now ready to go further. For all the diversification benefits, the cultural tensions between investment and retail banking can only be resolved by totally separating the two, on formal Glass-Steagall-style lines.

Other changes may also be required. The government must find ways to unblock the supply of credit to the economy. In the world of Basel III and higher capital ratios, plus tighter regulation, this may be difficult. But then other ways will have to be found. Mr Diamond’s forced departure marks a pivotal moment. The politicians must respond responsibly.

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