July 2, 2012 / 9:12 AM / 5 years ago

BREAKINGVIEWS:Banker backlash will go on and on

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By Hugo Dixon

LONDON, July 2 (Reuters Breakingviews) - The banker backlash has will go on and on. The interest rate-rigging scandal that has engulfed Barclays (BARC.L) is just the latest example of immoral or risky behaviour that has brought the industry into disrepute. The fact that bankers are still overpaid and need further bailouts at a time when Western economies are struggling makes the public’s blood boil. Tighter regulation of the industry and a squeeze on profit and pay will be with us as far as the eye can see.

The UK announced two new reviews at the weekend - one on Libor, the benchmark interest rate, and the other on bankers' professional standards. What’s more, Barclays Chairman Marcus Agius has fallen on his sword, while politicians from all parties as well as the Governor of the Bank of England have piled in to criticise bankers' ethics.

The banks can’t help themselves. The industry is infected by a culture of greed and arrogance. This leads bankers to break the rules, as traders at Barclays and probably many other banks did when they attempted to manipulate Libor. It also leads them to take undue risks as JPMorgan’s (JPM.N) infamous “whale” trader did, causing losses that are likely to exceed $2 billion. Although there are good, honest bankers, the problems are not confined to a few rotten apples. Even after five years of crisis, many of the industry’s leaders have a swagger in their step – which sets a tone that others in their organisations follow.

Most of society would probably just like to squish the banks. But finance is the economy’s nervous system. And as banking suffers, so does the wider economy. It is, for this reason, that the industry receives continual bailouts at the same time that the politicians are calling for tougher regulation. In the same week that the Libor scandal erupted, the Bank of England advocated looser liquidity requirements so that British banks would be better able to maintain lending to the economy. The fact that failing banks will be bailed out by taxpayers, as most recently happened in Spain, protects lenders’ profits so enabling them to keep overpaying their staff – which, in turn, further fuels the public’s anger.

The push to clean up the industry will therefore be a long drawn out affair. For every three steps forward, there will be two steps backwards. The trend is clear: tougher regulation, lower returns and reduced compensation. But the backlash is far from over.

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CONTEXT NEWS

- The UK government ordered an independent review on June 30 into the workings of key lending rates between banks, after U.S. and British authorities fined Barclays $453 million for manipulating the London Interbank Offered Rate (Libor). There will also be a second review into the professional standards and qualifications of bankers.

- Ed Miliband, leader of the UK Labour Party said on June 30 that there should be a full-scale public inquiry into banking culture and practices.

- Barclays Chairman Marcus Agius quit on July 2, saying that the interest rate rigging scandal had dealt "a devastating blow" to its reputation. The board also announced a “root and branch” audit of business practices within the company to be led by an independent third party.

- The U.S. Department of Justice statement of facts document released after the fine showed that a conversation in October 2008 between a Bank of England official, confirmed to be Deputy Governor Paul Tucker, and a senior Barclays official, believed to be Bob Diamond, led some at Barclays to believe that the bank had been granted permission to submit artificially low Libor estimates.

- Barclays Chief Executive Officer Bob Diamond will appear before the Treasury Select Committee on July 4 to answer questions about the scandal.

- Agius resignation letter: link.reuters.com/cah29s

RELATED COLUMN

Diamond abdication [ID:nL3E8HS4AL]

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

- For previous columns by the author, Reuters customers can click on [DIXON/]

(Research by Christine Murray)

(Editing by Peter Thal Larsen and David Evans)

((hugo.dixon@thomsonreuters.com)) Keywords: BREAKINGVIEWS BANKERS/

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