By Bob Duncan 
Bank of England Governor Mervyn King has said Britain’s banks need a “real change in culture” in the wake of banking scandals on a scale unseen since the banking crisis of 2008.
Sir Mervyn’s comments came as Britain’s biggest lenders were embroiled in fresh controversy over rigging key interest rates, as well as further evidence of mis-selling. The governor hit out at the banks for “excessive levels of compensation, shoddy treatment of customers and a deceitful manipulation of one of the most important rates”.
The latest scandals pile further misery on a beleaguered banking sector as it fights to restore its tarnished image in the wake of the financial crisis, the scandal of mis-sold payment protection insurance (PPI) and the computer problems at RBS which froze millions out of their accounts last week.
LIBOR, or the London InterBank Offered Rate, is the interest rate banks charge to borrow from each other to lend to customers and businesses and is used to set the rates of interest for almost £250 trillion in loans, mortgages, securities and derivatives.
The rate is set every morning by a panel of banks and overseen by trade body the British Bankers’ Association. Each bank sets the rates at which it believes it can borrow, from overnight to 12 months. As banks’ submissions aren’t based on real trades, they can be manipulated by unscrupulous traders.
Mervyn King has called for a major overhaul of the way in which one of the world’s most important interest rates is set, after it emerged that Barclays paid £290 million to settle claims that some of its staff manipulated the LIBOR for personal and corporate gain.
Regulators said that Barclays employees overseeing Libor and Euribor submissions routinely accommodated requests that benefited traders at their own and other banks. Barclays’ traders also conspired with ex-employees working at other banks to try to influence their Libor submissions.
During the financial crisis Barclays also fiddled the figures to dupe the market into thinking it was more financially sound than it was. A former chief executive of Barclays, Martin Taylor, told the reporters that the past practices at the bank pointed to “systematic dishonesty” over several years.
Speaking yesterday, Mervyn King told reporters in London that the existing system of calculating the LIBOR should be scrapped. “The idea that one can base the future calculation of LIBOR on the idea that ‘my word is my LIBOR’ is now dead,” he told a press conference. “It will have to be based in the future, in my judgement, on actual transactions in order to bring back credibility to the system.”
Prime Minister David Cameron, speaking in Brussels after a two-day summit of European Union leaders, said “We know what needs to be done, let’s get on and take those actions… in terms of accountability, regulation, taxation, transparency, behaviour, punishment for things that are done wrong—on every one of those action is required”.
He also kept up the pressure on Barclays Chief Executive Bob Diamond to fully account for what happened, stating “I think him and frankly the whole management team have got some very serious questions to answer”.
Mr Diamond, who was in charge of Barclays Capital (Barcap) at the time traders are now known to have been rigging the market, has offered to forgo his short-term bonus for this year. However he is still entitled to millions of pounds in salary and long-term share incentives. Pressure is intensifying on Britain’s highest paid banking boss to quit.
Hundreds of bankers across three continents are involved in the interest-rate fixing scandal that has left Bob Diamond fighting to save his job. At least 20 banks are believed to be under suspicion, with growing demands for a criminal investigation.
Chancellor of the Exchequer George Osborne gave the first indication that there could be a criminal investigation in the U.K. when he addressed lawmakers on Thursday and said British fraud prosecutors are now involved in the probe. The Serious Fraud Office is in contact with the Financial Services Authority and is considering whether to open a formal investigation, SFO spokesman David Jones said in an interview.
A number of employees have already been fired, suspended or put on leave at various banks including state-owned RBS, which has sacked and suspended ‘several’ staff, though the bank declined to comment.
Lloyds said it had suspended two traders. ICAP, the leading City broking firm headed by Tory donor Michael Spencer, has also been dragged into the scandal. It has suspended one employee and placed two on ‘administrative leave’.
Meanwhile, it was reported that RBS will admit similar money market rigging offences to those of Barclays, in which misleading submissions were made to the LIBOR offer, affecting mortgage and loans costs of its customers. RBS said it is cooperating fully with the authorities over the LIBOR probe but that any outcome was months away.
The bank was responding to an article in The Times that said it was set to pay about £150 million. “The process is not as far advanced as the article suggests and there can be no certainty as to the timing or amount of any fine or settlement at this point. RBS will continue to cooperate with the authorities,” the bank said.
RBS chief executive Stephen Hester has announced that he will also forgo his bonus this year on the same day it emerged his bank is facing a £150m fine over the inter-bank lending rate scandal. Mr Hester said his decision was a result of last week’s cataclysmic IT failures that hit thousands of customers and prevented money transfers.
It also emerged that a sacked RBS trader is accusing his bank bosses of colluding with staff to rig the financial markets to maximise profits in an explosive set of court documents.
The FSA declined to comment on the progress of its probes into the other banks but the regulator typically takes the degree of cooperation by an alleged wrongdoer into account in all its investigations. The FSA said “Barclays cooperated fully” and agreed to settle at an early stage.
The BOE will next year regain powers to police banks it lost to the Financial Services Authority in 1997 under a regulatory overhaul enacted by David Cameron’s coalition.
The LIBOR scandal was followed yesterday by news that the Financial Services Authority, the U.K. financial regulator, confirmed it has reached settlements with the U.K.’s four major banks after it found “serious failings” in the sale of interest-rate hedging products – known as swaps – to 28,000 small and medium businesses.
The FSA said that the four banks involved, Barclays, HSBC, RBS and Lloyds Banking Group, would take action to compensate customers that bought the most complex products and would stop marketing one of them to retail customers.
Banking shares were hammered yesterday as politicians weighed into the LIBOR-fixing scandal, raising the spectre of further regulation on the sector and threatening harsher punishments for the wrongdoers.
Barclays saw nearly £4 billion wiped off its market value as its shares plunged by 15.5 per cent. Royal Bank of Scotland was not far behind, shedding 11.5 per cent of its worth as Chancellor George Osborne confirmed it was among other banks being investigated.
Commenting on the growing scandal the SNP claimed that Labour MP Alistair Darling’s credibility during the financial crisis has been ‘fatally undermined’.
Mr Darling, leader of the anti-independence campaign, has been the target of a spate of criticisms from those close to him at the height of the first banking crisis. During a House of Lords debate this week on the growing Libor scandal, Labour peer Lord Tunnicliffe said:
“Criminal sanctions are extraordinarily difficult to bring about because of the burden of criminal law.
“It is fair to say though that you can’t find them in the current legislation. And, yes, OK, it’s our fault.” He added quickly: “I hope my leaders don’t hear me say that.”
The Labour peer’s admission follows claims last month from Bank of England Governor Sir Mervyn King that Darling’s failure to act quickly in the Northern Rock crisis cost Britain a million jobs.
A fortnight ago, FSA Chief Executive Hector Sants said that Darling had ignored advice which could have prevented the run on Northern Rock, the event which precipitated the recession in the UK.
SNP Treasury Spokesman Stewart Hosie said that it is now clear that the leader of the anti-independence campaign cannot now pretend to lecture others on financial competence.
Commenting, Mr Hosie said:
“Alistair Darling’s credibility as the face of the anti-independence campaign has been fatally undermined by yet another damning criticism of his handling of the financial crisis.
“Lord Tunnicliffe’s comments show who really crashed the banks.
“These ongoing and recent revelations lift the lid on Labour’s economic mismanagement, and ring true after the comments from the Bank of England governor and Hector Sants of the FSA over Alistair Darling’s failure to act on economic warnings.
“Alistair Darling’s failure to act brought on the banking crisis, causing a recession, which led to the sharp increase in unemployment.
“For too long Labour have been trying to pretend that the economic crisis has had nothing to do with them. Alistair Darling previously blamed the recession on the problems in the banking sector – and now we know those banking problems are a direct result of his handling of things when he was Chancellor.
“For the people of Scotland, the question is how much they can trust the word of those anti-independence politicians who are culpable for making a mess of the economy.”