Wolverhampton South East MP Pat McFadden sits on the Treasury Select Committee that yesterday grilled Bank of England Governor Sir Mervyn King. Today he explains how banks must change – or be punished.
What are banks for? You might think the answer is obvious but in recent years it has become blurred.
Most people would say the core functions of a bank should be keeping our money safe, processing payments, lending responsibly to aspiring homeowners and supporting businesses in the real economy who want to invest and create jobs.
Yet in recent years many of our banks have grown way beyond these core functions into gargantuan betting machines, manipulating ever more obscure financial instruments with the capacity to make and lose enormous sums of money. It is little wonder that Lord Turner, Chairman of the Financial Services Authority, described much of what they do as “socially useless”.
The recent story of banking excess came shuddering to an end with the financial crash of 2007/8. Taxpayers around the world were asked to pick up the tab. And we are all still living with the consequences.
RBS, which was a small and cautious Scottish bank when I opened my first account in it at 14 years of age, had to be nationalised because it had lost catastrophic sums through takeovers it didn’t need and couldn’t afford. HBOS was bailed out too. And it is important to remember this was not just a British phenomenon. Banks in the United States, Ireland, Spain and many other countries have also had to be rescued and nationalised.
Since then the banks have been trying to put their house in order but it is a painful adjustment. As they build up capital it means less is available to lend to support the economy. And in recent weeks we have seen computing problems at Natwest, an interest fixing scandal at Barclays and a money laundering scandal at HSBC.
At Barclays, a group of traders knowingly and fraudulently conspired to lie about their borrowing rates in order to gain a commercial advantage that wasn’t even for the benefit of the bank but for their own trading desks. And the interest rate they manipulated is used to calculate mortgages and business loans around the world.
Later on, the bank lied in a more organised way because it thought the true picture of its borrowing costs would make it look weak or lead to it being nationalised during the financial crisis.
When the House of Commons Treasury Select Committee on which I serve asked the regulators what they thought of Barclays they told us there was a culture of gaming the system, gaming the regulator and pushing the envelope. They had read the riot act to the Barclays Board in February of this year and that was before the report on the latest interest rate fixing scandal was published.
Those who created and presided over this culture have let down the hundreds of thousands of honest people who do a good day’s work in banking and financial services.
Banking and financial services are hugely important industries for the UK. It is an industry we are good at and it is very much in our national interest to sort out these problems.
The problem is not with the person we see in a local branch. It is much higher up. Capitalism has been undermined by the capitalists themselves.
I have been asked to serve on the Parliamentary inquiry into what went wrong at Barclays and what might be the wider lessons. We will certainly look into the LIBOR interest rate fixing scandal but there is a much wider and deeper issue and that revolves around the culture of the banks.
Too many of the banks have forgotten the core purpose that I talk of above. They regard their day job as manipulating exotic financial instruments rather than lending to businesses or homeowners.
The Parliamentary inquiry is just beginning its work and othinking will evolve. But I start by making two observations.
First, the culture must change so that the core objective comes back centre stage. I want banks that support my constituents’ aspirations to get on in life. I want banks that support good business ideas with long term lending that helps create jobs. And I want banks that see their job as serving the real economy, not serving themselves.
Secondly, when people do wrong, they should pay the price. Corporate fines that can be dismissed as a cost of doing business – like a parking ticket to a millionaire – are not enough. The law must be as harsh on the person in the pin striped suit as it would be to anyone else.
Put bluntly, when bankers do wrong they should go to jail.
Making sure those two things happened would not be a bad start. But even then, there is a long way to go before trust in this hugely important industry is restored.
This article was first published in the Express & Star on 18 July 2012.