Barclays LIBOR Storm Clouds

The LIBOR problem will spread well beyond Barclays and once again banks are being asked serious questions about their values and their culture. What next for the industry?

The manipulation of the LIBOR rate by Barclays and other banks is about to set-off another major crisis within the banking industry. There appears to be no question about the bank’s guilt as Barclays have actually admitted wrongdoing and have applied to the EU for whistleblower status.

For all the negativity that will be thrown at them in the coming days and weeks, that action on the part of the management is actually quite commendable. If you disagree then I suggest you look at the number of times banks have been caught doing wrong and pay large fines but at the same time refuse to admit any wrongdoing.

HSBC, UBS, RBS and Citigroup are also being investigated and the only thing we don’t know as yet is how many more banks are going to be involved and what if any criminal proceedings might emerge.

This latter point is particularly instructive. Despite pressure from the public, the management of major banks escaped any criminal proceedings post the financial crisis. While there were no clear indications that any such proceedings were warranted, that did not stop the call for their blood.

This time however, things might be different.

The whole episode underscores the single issue that this blog has been emphasizing time and time again—and that is that banks need a fundamental transformation of their values. Nothing brings this into perspective more than the rantings of some of the media commentators and pundits who claim that Barclays CEO Bob Diamond either must have known or should have known about the problem and therefore he should resign.

While Diamond must indeed accept the blame for the Libor problem and foregoing his bonus may not be good enough, these commentators clearly do not understand how large and complex organizations work. The reality is that it is impossible for any single person to know and/or control everything. This brings us to the second most important point that this blog has consistently argued—and it is that values are more important than controls.

If Bob Diamond is to resign it should be because he has not embedded the right values within Barclays, not what he should or could have known about what a few of his traders were doing.

The same commentators and pundits will also argue that the culture of banking organizations needs to change while at the same time insisting that a whole new set of legislation, regulation, governance and controls will be necessary to achieve that change. Unfortunately, they do not realize that while you can and should penalize bad behavior that is not how you change the culture of organizations.

Banks have placed themselves in an invidious position in that they are now so compromised that it is highly unlikely that they will be able to forestall the next wave of actions that the public will demand and politicians and regulators will send their way. This will happen irrespective of whether such actions will be effective or not.

The reality is however that in the long run great organizations cannot be created by legislation and regulation—meaning that any change has to come from within the industry itself. So far, it appears that the industry is either unwilling or unable to make the necessary transformation.

Yet, change it must and in the next article I will set out exactly how a fundamental transformation can be effected.

Jonathan Ledwidge is the author of the book Clearing The Bull: The Financial Crisis and Why Banks Need a Human Transformation. Use this link to give your opinion on the performance of banks post the financial crisis.

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