The phoney war is over. As almost every financial commenter and politician has declared in the last 24 hours the Barclays Libor scandal is a game changer for the banking industry. Yesterday's disclosures have destroyed any hope that the banks may have held since the banking crisis struck that they could get back to business-as-usual with only higher capital requirements, bonus restrictions and the ring fencing of retail operations by 2019 as a payback for the crash of 2008.
What has been striking is that even usually indefatigable supporters of banking (if not of bankers or specific banking practices), such as Allister Heath of CityAM, are a constant presence on the BBC demanding that a serious and radical reform of banking practice and culture is now necessary if London is not to lose its pre-eminence as a global financial centre.
Today it isn't just the likes of trade unions or the Occupy movement demanding a day or reckoning with the banks, but the leader-writers of the Financial Times, right wing Tory MPs and the governor of the Bank of England.
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Three things now need to happen. It is extraordinary that four years on from the banking crisis there has been no Parliamentary investigation into the causes of the banking crisis and its aftermath. Seeing that a Leveson-style judicial inquiry is being called for by MPs from both sides of the house, this will almost now certainly take place. If you wish to speed things along, you can sign this petition.
Cathartic though it may be, rest assured that the disclosures of malfeasance, greed, and incompetence that it will reveal of our major banks, our regulators, our central bank and our politicians will be very painful indeed. It is almost inevitable that this will hurt London as the financial marketplace, and with it a sizeable chunk of UK tax revenues, employment and export earnings.
Secondly there needs to be a revisiting of the proposed regulatory changes. There is a popular misconception that bankers have 'got away with it' by not having draconian regulation forced upon them or having to give up their bonuses. In fact, there has been a whole host of new regulatory measures introduced, from Basel III capital requirements to the Vicker's Commission proposals. And if you think it is pre-crash business as usual regarding bonuses, then I suggest you go and talk to a banker.
However, the Libor scandal has shown that concepts such as self-regulation and Chinese walls just don't work without a strong regulatory framework. I suspect a full Glass-Steagall split between retail and investment banking is now likely.
Today's disclosures of mis-selling of derivatives to SMEs will also lead to tougher regulation and oversight on any retail banking activity. It's also difficult to believe that Osborne won't find more funds to beef up organisations such as the FSA and HMRC. The City of London will become a far more onerous place for bankers to conduct business.
Thirdly, there needs to be a change of culture - and this means a wholesale clearout of the current generation of top bankers. It is incredible that Barclays' board didn't meet first thing yesterday morning and demand Diamond's immediate resignation. The reason cited is that Barclays wasn't alone in the Libor scandal and one can't expect every bank's CEO to resign. Well, why not ?
Bankers such as Bob Diamond, regarded by his peers as one of the best bankers of his generation, have led charmed lives. Like a fund manager long beta in a bull market, the likes of Diamond have confused luck with talent. Had he not been outbid by RBS for ABN Amro Diamond would have been responsible for the collapse of Barclays.
The prohibition on proprietary trading, the rising cost of capital and bonuses taken over five years and subject to clawback will continue to eat into investment banking margins, and with it the high risk bonus culture of the trading floor. Banks will become smaller and more focused on customer service. With investment banking no longer paying the bills, and the likes of peer-to-peer lenders and the supermarkets entering the retail banking sector, expect to see major changes in high street banking.
Twenty five years on from the Big Bang reforms that transformed the City from its leisurely niche of long lunches and business conducted over a handshake, it is time for a similar revolution.
Nick Reid is a former hedge fund manager
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