Bank of England official Andrew Haldane told the Occupy group that the Libor scandal has prompted real change by stoking an impetus for banking reform.
“I think things then just changed,” he said at an event organized by the group in London yesterday. “That for me was the straw that delivered real change.”
Haldane, executive director for financial stability and a member of the central bank’s Financial Policy Committee, spoke after telling Occupy that its protests centered on St. Paul’s Cathedral in London’s financial district had not been in vain. They helped prompt a “reformation of finance” that is in its early stages, and proposals to change banking may amount to the biggest change since the 1930s, he said.
“This crisis will scar a generation,” he said. “It will keep on coming back. That will provide a durability to the reforms I just mentioned.”
Haldane spoke at an event organized by Occupy Economics called “Socially Useful Banking.” He introduced his speech by noting that the chief executive officers of Barclays Plc and Lloyds Banking Group Plc have recently said banks need to “rediscover their social usefulness.”
Barclays was fined a record 290 million pounds ($465 million) in June for attempting to manipulate Libor. The fine, coupled with criticism from regulators, triggered the resignations of Diamond, Chairman Marcus Agius and Chief Operating Officer Jerry del Missier. Other firms are still being probed over alleged rate-rigging.
“Occupy has been successful in its efforts to popularize the problems of the global financial system for one very simple reason: they are right,” Haldane said.
Police evicted the last Occupy London campaigners from Finsbury Square in June, eight months after the income inequality demonstrations began in the U.K. capital at St. Paul’s, where protesters had already been removed.
In his speech, Haldane said that financial institutions might need to split in two if ring-fencing of retail and investment bank operations as proposed by John Vickers fails to change their culture. The plan by Vickers, a potential candidate for Bank of England governor, has similar aims to those of the U.S.’s Volcker rule and a European blueprint suggested by Bank of Finland Governor Erkki Liikanen.
“Can two separate sub-cultures really operate underneath a single roof? Time will tell,” he said. “If it is not possible, then full separation would be the logical next step. Alternatively, banks themselves might of course voluntarily choose to divest and separate, as some are already doing.”
He said that cultural separation should be an “acid test” of success of any plans to change the banking industry.
“The culture and practices of investment banking infiltrated retail banking -- a sales culture which culminated in harmful cross-selling and unlawful mis-selling,” he said. “If they are successful, these structural reform efforts will reverse this pattern.”
Haldane listed culture among five areas beginning with “C” where banking needs to change. The others are capital, compensation, credit and competition. On the latter, he said that everyone can play their part.
“If as bank customers we want to change the culture of banking, then we should start by supporting those banks who are delivering that change,” he said. “Putting your money where your mouth is would deliver far greater and more durable change than any amount of banker bashing.”
Lenders such as Svenska Handelsbanken AB, whose expansion in the U.K. may make it one of the country’s fastest-growing banks, is gaining customers by making credit decisions locally and eschewing bonuses in favor of a shared fund pooled annually, Haldane said. A preference for banks with a culture of focus on basic banking services can help address the problem of a lack of competition in lending, which fed the financial crisis.
“We need to raise our levels of ambition when breaking down barriers to entry into banking, to ensure bank customers get a fair and efficient deal,” he said. Proposals that store customer account details in a shared utility could facilitate transfer between banks, as it may with gas and mobile phone providers, he said.
On compensation, Haldane noted a “deeply-rooted problem of short-termism,” in capital markets.
“Altering the time horizon for pay would be a good starting point,” he said. “For example, some banks now use a remuneration model based on ‘deferral until retirement.’ It would be fantastic if that caught on.”
Haldane said that there is now a particular impetus to prove to investors that financial centers are secure.
“What you see these days with people very nervous, very panicky, very uncertain,” he said. “What they want first and foremost is a safe financial system. Financial centers are going out of their way to show that they are safe and sound.”