What we can learn from Barclays

In order for our banks to regain public trust, they need to change their culture, and remember their core purpose — of service to the community, writes Ray Kinsella

BANKING in the UK has been convulsed with a new crisis. The epicentre, for now, is Barclays Bank, and specifically its investment (as opposed to retail) banking activities. The catalyst is the finding, in a report published last week by the UK’s Financial Services Authority (FSA), working with its US regulatory counterparts, that the bank was involved in the manipulation of the data which determines the London inter-bank offered rate (Libor) in the period 2005 to 2009.

The FSA report has led to the resignation of the Barclays chairman and CEO. The CEO, Bob Diamond, had effectively built the investment bank into a global giant. At a presentation before the UK Treasury select committee yesterday, Mr Diamond criticised the “rate rigging” culture as “appalling” in itself and in its effects on the reputations of the great majority of traders.

The crisis, which is gathering momentum, is a devastating setback to the rebuilding of trust in the global banking industry. It undermines the reputation of the London markets and could yet be the catalyst for a break up the whole retail/investment banking model.

Banks borrow from and lend to each other all the time in the inter-bank market. The Libor is the rate at which major banks determine the costs of borrowing amongst themselves.

However, the rate charged is also a measure of the markets’ confidence in the banks’ strength. A concern was that high-reported borrowing costs from the inter-bank market might undermine confidence in the bank at that time — and possibly the wider UK banking sector. So, the real borrowing costs were not fully reported.

The Libor debacle matters. Libor helps determine the costs of financial products, from household mortgages to derivatives. The crisis also raises in the starkest terms the whole issue of governance, leadership styles, and the morality of corporate capitalism within the global banking arena. In addition, because the world of investment banking is truly global, a crisis of trust in one part of the system instantly transfers across the wider system.

The crisis provides a learning opportunity for Ireland. The corporate culture of an organisation is determined by three elements: Its perceived purpose, its values, and the manner in which it lives out these values.

Western countries have learned the hard way that the core purpose of banks is not to generate trillions in profits, the distribution of which can be carved up by private interests.

Banks get their legitimacy from the community. It is the community which provides stable deposits, which generates the demand for productive loans. It is the community — in the form of men and women setting out to work every morning — which provides the expertise that sustains the bank. Ultimately, it is the community which picks up the tab when something goes very, very wrong.

This responsibility was once discharged through the banking profession. In the decades leading up to the 2008 crisis, banking’s stewardship purpose was progressively hijacked. Despite all that has happened in the meantime, banking remains in the wilderness — the connection with the community, sometimes called the common good, has not been made.

If we in Ireland are to learn from Barclays, a number of realities have to be grasped. A recovery in the economy requires rebuilding trust in our domestic banking system. Also, we have a large and very robust external financial system in the form of the IFSC. The IFSC has, to date, been one of the great successes of modern Irish economic history. This is largely down to good leadership both from within the sector and also in its dealings with the regulatory authorities. It pays great attention to the concept of good stewardship. So we need to rebuild trust in our domestic system and to retain the trust of international banks which are based here.

The erosion of the corporate culture of banking brought down the financial system — and the economy. At the same time, it is important to acknowledge that there are, and always have been, highly ethical and responsible individuals operating within the banking sector in Ireland. The problem was that where there is a negative corporate culture those who are most aware of the responsibilities of stewardship are more likely to be marginalised by organisational politics.

Regulation alone will not rebuild trust. The UK financial sector is knee-deep in regulation and oversight. Nor will regulation alone ensure that we avoid a repetition, in one form or another, of yet another crisis, rooted in deficiencies in the corporate culture of banking. The Barclays crisis seemed to come out of the blue — in fact, it was a product not alone of a regulatory gap but also of the temptation for a corporate culture to accommodate itself to what it (mis)understood as tacit approval from government.

IN IRELAND, there is a new regulatory framework based upon forceful oversight, with a credible threat of enforcement. It is an instructive exercise reviewing the sheer body of regulatory legislation that has been enacted in Ireland in the past three years. It can be difficult to strike a balance between the need for forceful regulation and the problems of overregulation but, at some stage, the sheer burden or regulation becomes costly and counter-productive.

It also misses a key point: What is really needed is a change in the culture of banks — how they recruit and treat their staff and, crucially, their customers — and also what they conceive of as their core purpose. Banks have to be profitable but their purpose goes beyond profitability. Ultimately it’s about service to the community, from whom they derive their legitimacy.

That is the irony. We are actually rebuilding, at enormous cost, a business model substantially unchanged from that which imploded. Think about it. If you were to give to an “all-wise” agency €80bn or so (which is the direct cost of the banking crisis to the country) and asked them to come up with a banking model that really delivered on the common good, you’d be expecting something better than that which we are now rebuilding.

There is much more regulation, much more oversight. But what we have not done is to explicitly connect the purpose and culture of the Irish banking system to the welfare of the public and to the regeneration of business. Setting targets for lending to SMEs, and more regulation by the public sector will not resolve this issue. It’s about being re-connected to professional values and it is about embedding a culture of stewardship. The profitability of a bank is umbilically connected to the stability of the economy it serves and the interests of the communities within which it operates. The Barclays debacle shows what can happen when we lose sight of this reality.

Finally, the Barclays crisis may be the catalyst to help rethink the wider implications of what is happening in the banking industry and how this should relate back to the community. For example, banking in Ireland and elsewhere is migrating rapidly to web-based platforms, delivering a proliferation of apps-based services. That provides great opportunities for customers, businesses — and also for innovative Irish software companies. At the same time, in the short to medium term, retail branches have an important social role to play. They interface directly with the community and provide expert advice to households and businesses. Short-term cost-reduction targets should not crowd out innovative thinking about all that branches could deliver in the context of the hi-tech banking environment.

* Ray Kinsella is on the faculty of the UCD Michael Smurfit Business School