The reaction of the British Bankers’ Association to the revelation that Barclays traders had been manipulating the Libor interest rates — they say they were “shocked” — is reminiscent of the scene in the movie Casablanca in which the gendarme Captain Renault closes down Rick’s gambling joint and says “I’m shocked, shocked to find that gambling is going on in here!” while simultaneously pocketing his winnings.
If the BBA was genuinely unaware then its officers need to get out more. Its assertion looks doubly ridiculous given that it shares a chairman with Barclays, and will look increasingly unbelievable if, as seems likely, more banks are found to have engaged in this practice.
First, the arguments against separating retail and investment banks were always thin. Now they are surely unanswerable. It is quite clear that whenever we allow investment bank traders to operate alongside retail bank operations which are central to the economy’s essential functions of credit creation and payment systems, the traders will overwhelm the retail bankers and the results will be damaging to the vital retail banking operations. We saw this in the causes of the credit crunch when the investment bankers devised an alphabet soup of toxic products — CDOs, CLOs, CDOs-squared — and sold them to customers of the banks. We have seen it again with the staff taking part in the Libor setting suborned by their traders.
What needs to happen? The UK and the US must enact a Glass-Steagall Act (the 1933 Banking Act passed in the wake of the Great Crash which separated commercial and investment banking) and separate retail and investment banks. Ringfencing, as proposed by the Vickers commission, will not work.
As this Libor scandal illustrates, ways will be found to climb over, burrow under and go round the ringfence. The only people who seem to have lobbied against such separation are bankers.
In addition, we need to learn an important lesson about who should be allowed to run banks. Traders should never be allowed to run banks. Traders are all about the short term and their myopia leads them to do things for short-term profit which risk ruination in the longer term. In my view, every bank that puts a trader in charge risks ruin.