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It is time for big banks to do some soul-searching

“Investigations by regulators in several countries, including Canada, America, Japan, the EU, Switzerland and Britain, are looking into allegations that LIBOR and similar rates were rigged by large numbers of banks. Corporations and lawyers, too, are examining whether they can sue Barclays or other banks for harm they have suffered. That could cost the banking industry tens of billions of dollars. “This is the banking industry’s tobacco moment,” says the chief executive of a multinational bank, referring to the lawsuits and settlements that cost America’s tobacco industry more than $200 billion in 1998. “It’s that big,” he says.”

The Economist (July 7, 2012)

What a period this has been for the world’s big banks. Not since the 2008 credit meltdown have they had such a bad few weeks. Back then, they had the opportunity to blame external events; this time, they have no choice but to finally look inward.

A chronology: First, it was JPMorgan. Its CEO was forced to admit its London office had made wrong-way bets on derivatives, losing billions of dollars.

Second, it was RBS. The huge UK bank, the beneficiary of a massive government bailout in 2008, suffered a systems meltdown. Millions of customers were left unable to access their accounts, check balances or make payments – for days on end. Analysts blamed underinvestment and lax standards in IT systems.

Next, most painfully, was Barclays. The global icon was fined a record $450 million by US and UK regulators for manipulating LIBOR, a benchmark interest rate used to set payments on a multitude of instruments, from complex derivatives to simple mortgages. Both its global chairman and CEO were forced to step down (with the chairman comically withdrawing his resignation in the wake of the CEO’s the following day).

Not to be left out, HSBC came flying in. It expects to have to pay up to $1 billion in fines for failing to have appropriate controls in place to block the financing of terrorism and other criminal activities such as money laundering.

Have I left anyone out? Only pretty much all the other big banks in the world, many of whom will also be roped into the LIBOR and money-laundering scandals. Not many will survive this “tobacco moment” unscathed.

What is going on here? Why this procession of scandals and fines, and why have banks fallen so far so fast in public esteem? The excerpt shown, please note, is not from Socialist Worker; it is from the venerable protector of free markets, The Economist. That publication went further, calling bankers “banksters”, and asserting, “little remains of public trust in banks and those who run them.”

This is really not about a bank or two; it is about a financial system and a culture that needs reinvention. Various chickens are coming home to roost in various banks at the same time. Some estimates suggest big UK banks may have lost half a million customers to smaller rivals in 2012 alone.

Once upon a time, banks were a central part of human endeavour, founded on integrity. Customers trusted the people they gave their money to for safekeeping. That is a far-gone era. Today, ordinary banking is caught up in the casino culture that values massive bets and focuses on numbers on a screen rather than effect on ordinary lives. It has lost its emotional bond with its customers; and debased its rightful role in human society. Huge universal banks cannot even keep control over their many arms.

This implosion in banking values is thus far a western phenomenon, and we in East Africa are relatively insulated. But we must remain vigilant and not cede control to glorified gamblers. Banks must return to first principles and reclaim the acclaim of customers and the confidence of society.

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