Banking excuses wearing thin as fines top US$200 billion

Some of the world’s largest banks have admitted criminal conduct in manipulating the global foreign exchange market and have been fined some US$5.7 billion.

These penalties are by no means the first for the industry, and they’re not even the first to address forex fixing – earlier fines means mean the total is now at US$6.3 billion. In sum, the sanctions handed down to the banks suggest there is something very dark at the heart of banking. Fines totalling some US$200 billion (and growing) have been levied against large banks for various offences in the past five years.

In this latest case, Barclays, RBS, Citigroup and JP Morgan have been forced to enter guilty pleas while Swiss bank UBS was granted immunity as it was the first to report the wrongdoing. It has, however, agreed to plead guilty in a separate case over the fixing of LIBOR, the rate at which banks lend to each other.

The excuses are running out. First, banks claimed there were only a few bad apples. Rogue trader Nick Leeson, of Barings fame, was back in the news this week warning, of all things, about the Chinese economy. But, as with the FX Options scandal at National Australia Bank in 2004, it was never about individuals and, as public inquiries found, these banks were riddled with “cultural” problems from top to bottom.

Bankers have pleaded for forgiveness and have been very piqued when the public have been sceptical about their sorrow. Time to move on has been the cry.

Then along came the LIBOR interest rate manipulation scandal. For that, banks have paid some US$9 billion of shareholder’s money. A few mid-level staff were fired, the rest moved on.

This week it’s foreign exchange trading that’s back in the headlines, with banks forced to admit they manipulated the FX markets, ultimately diddling pension funds out of millions of dollars.

A litany of bad behaviour

But it doesn’t end there.

HSBC, one of the largest banks in the world, is mired in tax evasion and money laundering charges and BNP, the largest French bank, was recently given an eye-watering fine of almost US$9 billion for sanctions busting.

The big four UK banks have been landed with bills for over US$30 billion for misselling Payment Protection Insurance. And the four big Australian banks were hit with huge penalties for tax avoidance by the New Zealand Inland Revenue. The scandals just keep coming.

These scandals did not happen in sequence nor out of the blue, instead they were all going on at the same time in the same large banks, the so-called “Systemically Important Banks”.

Banks could argue they have had a run of particularly bad luck, but that’s not borne out by their ever-rising profits. There definitely appears to be something going on in banking beyond what the “bad apples” excuse could explain.

There are solutions aplenty. From the banks the usual response has been: “Yes we did wrong, but leave it to us to clean up.” And from the regulators: “Yes they did wrong, but if we only we ask them to keep more capital, everything will be OK.”

But banks have not cleaned up their acts, least of all when asked to keep more capital. More capital, more risk, more taxpayer support tends to be the outcome.

What’s really going on?

It’s not as if banking has been taken over by a band of marauding criminals. The vast majority of bankers are in fact nice people. But nice people sometimes are trying so hard to do a good job that they don’t (or don’t want to) see something bad going on.

And it does appear that banking may actually make people behave badly.

A recent study found that banking employees are as honest as everyone else until they are reminded they are bankers, at which point they become less honest. This appears to imply that merely the mention of banking makes people dishonest. If true, this is troubling. Banking, whether we like it or not, is integral to everything we do in our daily lives.

If banking staff can just switch on/switch off honesty, then changing that reality means starting with the individual, not the culture, the bank nor the system. Individuals have to change.

Pledging ethics

One initiative that has merit in this respect is that of the Banker’s Oath. Some banks have picked up this very worthy Dutch initiative and developed an Oath, similar to the Hippocratic one, which bankers can swear.

Behavioural Economics teaches us that people will behave better if they are constantly reminded they have wider responsibilities than their jobs. The mere mention of the US Constitution or Bible has been found to cause people to tell fewer lies (interestingly even if they are atheists). It appears that we all (not just bankers) need constant reminding of our moral compasses.

As a start (and it is only a beginning) instead of waiting for individual bankers to sign, why not put the Bankers’ Oath everywhere? On bank tellers’ windows; on their computer sign-on screens; as screen savers; on the front page of all documents; and in pay statements. And also give the text of the Oath to customers: enclosed with bank statements; on ATM screens and on the backs of plastic cards. The impact could be extended if bankers that transgressed their Oath were then openly shamed.

Pat McConnell does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.