Bank scandals tarnish London's reputation
It's been a tense summer in the City of London as one bank after another has faced allegations of massive misbehavior.
Bankers in the British capital, which has for centuries been a centre for global business, fear its reputation has been tarnished indelibly and that a heavy-handed regulatory crackdown is looming.
First came UK bank Barclays. Its chief executive, Bob Diamond, was forced to step down last month after US and British authorities fined the bank US$453 million for manipulating a key market interest rate. Other banks are being investigated for their part in the scandal. Then there was HSBC, another big London-based bank. It faces fines of up to US$1 billion after the US Senate issued a damning report last month alleging it had failed to stop the laundering of Mexican drug money.
Back in May, JPMorgan Chase & Co disclosed a surprise US$2 billion trading loss — later upgraded to US$5.8 billion — racked up by its London office in a portfolio designed to hedge against risks the company takes with its own money.
And now Standard Chartered, that most predictably profitable of British banks, has been accused by a regulator in New York of laundering Iranian oil money for years.
David Buik, an analyst at brokerage firm BGC Partners, says he's never seen a worse summer in the City.
"Never, not in 50 years in the marketplace. I don't recall anything like it at any time," he said. "Our banking sector is probably under greater stress than in 2008," he said, referring to the year when a global credit crunch caused several banks around the world to collapse.
"We will get out of it, but it is a blow that means regulators will have a greater say in life, which means that economic growth will be slower."
The City's current banking culture began in 1986, when Margaret Thatcher's government introduced the "Big Bang" deregulation that ended the earlier, clubby atmosphere based on individual relationships. That brought investment banking to Britain, with its culture of risk-taking, big bonuses and a focus on short-term returns.
Since the financial crisis broke out in 2008, that culture has come under attack for costing taxpayers billions in bank bailouts and for resisting reform of executives' huge bonus schemes.
An informal survey of 314 global finance professionals by the London-based Chartered Institute for Securities & Investment last week found that two-thirds have little or no trust in the British banking industry. Only two per cent rated the banks totally trustworthy. The Barclays scandal in particular damaged the reputations of both the British regulator, the Financial Services Authority, and the Bank of England.
Barclays admitted in June that some of its traders had made false submissions of interbank borrowing rates, which are used in calculating LIBOR (London interbank offered rate), a key index for pricing some US$500 trillion in global financial contracts, including mortgages.
But the increasing frequency of scandals in British banking over the past months has raised questions over the country's ability to manage its huge financial sector.
In July, Prime Minister David Cameron announced a parliamentary enquiry into the culture and practices of the industry to help decide what new regulations and structures are needed.