Today’s banking model is close to being broken

The questionable culture generated by the Barclays CEO is hardly unique. Other banks in turn will be exposed
Called to quit: Bob Diamond
29 June 2012
WEST END FINAL

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In the teeth of this latest crisis, it is easy to forget that Barclays has diced with death before. If Fred Goodwin and partners hadn’t gatecrashed the party with a higher offer, Barclays would have merged with ABN Amro five years ago. Thanks in part to its pairing with the Dutch bank, Royal Bank of Scotland hit the skids. Initially disappointed, Barclays sailed on serenely, making great capital out of not requiring a government bailout while several of its rivals went cap in hand to the Treasury.

I remember clearly one of the press conferences called by Barclays when it was trying to convince the City that going Dutch was the future. The then chief executive John Varley, in pinstripes and braces, was making light of relocating to the Netherlands, one of the conditions of the deal.

Afterwards, Bob Diamond, Varley’s altogether slicker lieutenant and head of Barclays’ investment bank, made clear what he thought of the idea.

“I’m staying put,” he hissed. And so it has proved, with Diamond, the adopted Londoner, succeeding Varley as the boss last year.

To have Varley at the head of Barclays during this firestorm over the manipulation of interest rates would have been the case of the bumbling Brit. Diamond has developed into an altogether more pantomime villain. It looks hard for him to survive.

Despite trying to play the good citizen, Diamond’s efforts have backfired terribly. Few bankers have done more to try to get the industry to pick itself up and get on with it than Diamond. But the speeches about the need for banks to play their part in broader society have been given with the knowledge that this wrongdoing could have erupted at any moment. Mis-selling interest-rate insurance to thousands of small businesses only compounds the feeling that there are numerous skeletons still to fall from the industry’s closet

The humbling of Lloyds and RBS has left Diamond as one of the few bank bosses free to speak up for the industry. It has been a role he has fumbled badly — first by trying to establish a link between good corporate citizenship and paying taxes just before Barclays was stung with a £500 million tax avoidance bill; then for his giant pay package, inflated by a sum for “tax equalisation”. The banks’ failure to capture the public mood goes on.

Moving past the financial crisis has been his mantra. As politicians continue to pore over what went wrong four years ago to inform the Financial Services Bill, his plea has failed. When something as obvious as preventing banks from setting the inter-bank lending rate themselves hasn’t been addressed, it suggests this process of redemption hasn’t been so thorough after all.

The thing to remember about Diamond is that he isn’t in it for the money. Long before joining Barclays in 1996 Diamond grew rich running fixed income and foreign exchange teams at Morgan Stanley and CS First Boston.

What drives him now is the desire to prove he can run a fully-fledged, global investment bank from London. Looking out across Canary Wharf from his office near the top of Barclay’s steel and glass headquarters, he can see there aren’t many institutions like his.

Such ambition goes against the grain of what the Square Mile became after the Big Bang that liberalised the City nearly 30 years ago. Then, the old banking names were overwhelmed by waves of cash that arrived from Wall Street from those sensing a once-in-a-generation opportunity.

For its part, Barclays had its head down buying a pair of historic merchant banks that gave it scale in a new area — taking a defiant step away from its Quaker roots. Diamond turbo-charged that ambition, gaining plaudits for his audacious swoop on the remnants of Lehman Brothers to give the bank a real presence in the Americans’ backyard as the banking crisis raged.

Fast forward a few years, and banking is at a crossroads. There is an uneasiness about the bank Bob built: its global reach and its questionable culture. The sheen lent by its patrician chairman, Sir Marcus Agius, is no longer enough to quieten the doubters. But remember that Barclays is only the first in the line of fire.

London, as host to Britain’s financial services industry, can understand better than the rest of the country that alongside those few who have genuine disregard for the public at large, there are thousands more in the City who are working hard, generating wealth and paying taxes to bolster our economy. But the love-hate relationship is becoming more ingrained.

With Barclays, politicians have made great capital calling for heads to roll but several more banks will be caught in the same trap in the coming weeks. Trust remains an issue right across the industry. Retail customers still reeling from NatWest’s IT meltdown are hardly likely to cross the street with their savings to Barclays now. Small and medium-sized companies grumble too. But away from their customers the whole financial model of banking is under threat too.

A weary hedge-fund manager sketched out in great detail for me recently why he wouldn’t touch bank shares with a bargepole. This wasn’t an elaborate exercise to short the shares — just an attempt to spell out that today’s banking model is close to being broken.

Profitability is on the slide. The area where banks have made most of their money in recent years — trading — is deep in recession. Volumes aren’t expected to return to the level of recent glory years.

On top of that, new capital requirements designed to reduce risk mean that banks must pile money on their balance sheets instead of lending or spending it. Necessary as those measures may be, they have crimped profit margins.

What is the solution? Barclays alone has seen its shares suffer a precipitous slide. After this latest setback, the stock is a fifth lower than it was a year ago — and that comes after a 16 per cent slide during the preceding 12 months.

Must banks adopt a model of social conscience to win permission to earn a profit? Some would rather die. But this pernicious attitude to the outside world must be stamped out. If that means heads must roll right at the top of these organisations, so be it.

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