barclays

Banks: Why We Can’t Use a Sledge Hammer to Correct a House of Cards

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While banks need to earn back our respect, moves to strengthen the system should be handled sensitively.

The challenge is that a low level of regulation hasn’t worked while too heavy handed regulation could be just as damaging. Elevated regulation costs could be passed on to the consumer in terms of higher borrow costs and lower credit availability. The ‘man on the street’ may be the ultimate victim as a tougher environment leads to job losses as companies struggle to finance themselves.

The misunderstanding is that it is not as binary as ‘retail good’, ‘investment banking bad’. Ringfencing and protecting one part of the industry from its perceived higher risk other half is a flawed strategy. Good assets can go bad, as we’ve seen in Europe as certain government bonds have become less and less credit worthy, with the likelihood of default increasing. Retail banks have gone bankrupt, far from worthy of their halos. Furthermore there’s the issue of funding. Retail banks are subsidised by investment bank revenues. Therefore again, those with a high street bank account could be hit with fees to have a deposit account. Although it may be argued this cost is preferable to the possibility of greater losses from instability. Nevertheless, instead of a focus only on separation, the issues to tackle run deeper.

It’s about mitigating the risk not just moving it about. We need interests to be brought back inline & not incentivise  excessive risk taking. Nonetheless, while banks remain fragile, complex & different to each other, the situation needs to be handled carefully.

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Crisis – Coming To A Bank Near You…

Diamonds Aren’t Forever and The Damage Could be Drastic

It appears that ‘diamonds aren’t forever’ as Bob Diamond steps down from his role as the CEO of Barclays Bank, amid investigations into interest rate manipulation. Instead, disruptions to the banking industry will be widespread and with far reaching consequences. Damage to confidence could reign in credit availability even further, lead to job losses and even affect our standing within Europe.

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Could I Have Been Affected?

With between 200 and 250 thousand mortgages linked to the benchmark interest rate (Libor), many may have been affected by rate manipulations. However, it is unclear whether they would have lost out or benefited from the activity. Barclays traders have been accused of both pushing up the rate, as well as pushing it down. Depending on the environment, on some days it would have been better to borrow at cheaper rates, and on others to earn more when lending.

Who’s Next?

Barclays is not alone. The investigation into interest rate manipulation has already touched 18financial institutions, with 12 having fired or suspended employees. Furthermore, in addition to scrutiny from the regulators, many banks face private lawsuits as well. RBS is a prime example. After having terminated or suspended at least 4 employees, the bank is facing a wrongful dismissal lawsuit from one of them claiming they were used as a ‘scapegoat’.

Lending & Employment the True Victims

The banking industry is the largest private sector employer, providing over 1 million people with jobs. Already struggling with low trading volumes, low merger & acquisition activity, weak economic growth and tighter regulation costs, Credit Suisse is rumoured to be planning to cut a third of their senior roles in Europe. As Barclays agrees to pay a $451m settlement as a result of these investigations, we see a glimpse of the additional burden banks will have to bear and the further cost and job cutting that may result.

In this environment, banks will not be encouraged to lend. Lending: More than £100bn of lending has already been withdrawn from the economy in the last 4 years, regardless of the Bank of England pumping over £300bn into the economy. Small firms are being asked to pay higher rates to borrow and keeping in mind they create the majority of new jobs, again the outlook for employment is worrying. As Chancellor Osborne asserted “What we don’t need is (the banking industry’s) reputation tarnished” instead “we need Barclays to be focused on lending”.

Support for a Banking Union?

As an example of insufficient oversight, these investigations could heat up the debate between those wishing to maintain a level of independence and authority over our banks against those in favour of our participation a Banking Union. This would involve a single regulator to oversee banks across Europe and answer calls for greater control over the banks. However, with the situation in Europe deteriorating, as unemployment continues to rise and debt burdens remain a challenge, there has been opposition towards greater integration.

The spotlight is well and truly back on the banks. Investigations must be handled carefully otherwise it could be the ‘man on the street’ that will feel the consequences.