The curious case of Standard Chartered

And another bad week for banking.

This has been another bad week for the banking industry. For all that some sections of the media will enjoy presenting the allegations against Standard Chartered as the latest example of greedy bankers putting financial interests before ethics or morals, this episode feels more nuanced

That it involves the self-proclaimed "boring bank" Standard Chartered, previously praised by myself and several much wiser industry experts for its prudence and caution through boom and subsequent financial crisis, is unexpected. That it involves a UK bank allegedly consorting with drug dealers, terrorists and Iranian militants seems even stranger. So what does this episode teach us about the state of banking?

1. The banking industry is no longer held in high regard. Had the allegations been made against a firm in another industry or profession there would have been genuine shock as well as outrage. But we appear to have reached some kind of greed fatigue when it comes to bankers. The only surprise at this latest revelation was that it involved a bank formerly thought to be above the rest. Standard Chartered’s reputation (not to mention its share price) has taken a hit and will take a while to recover.

2. International finance is extremely complex. This is easy to believe because it’s only when a fresh scandal breaks that some new complexity of the financial system is revealed. Very few outside the Square Mile knew a collatoralized debt obligation from a credit default swap before the 2008 financial crisis. Some within the City (including senior figures) struggled to explain them even when they’d turned bad and taxpayers were footing the bill. Every awkward revelation since has unveiled a bit more complexity. One reason ex-Barclays CEO Bob Diamond gave little away to the Treasury Select Committee was because they didn’t know enough of the detail. A simple question from Bob about which Libor rate they were referring to would have stymied most of the committee. Very few people understand enough to take bankers to task. Regulating and overseeing this complexity is tough. It’s hard to even begin to guess where the next scandal will be, what fresh villainy it will reveal and what new complexity will be uncovered. We need banking legislation that can cover what Donald Rumsfeld would call the unknown unknowns.

3. We need prudence back. It became something of a comical phrase after Gordon Brown first wore it out as chancellor and then abandoned it when the sums got tricky. But effective regulation of banks requires prudent valuation of their complex financial dealing and of assets and liabilities. It used to be an essential element of all accounting best practice, but has been increasingly forgotten as modern standards (including IFRS) place the emphasis elsewhere. More thorough auditing and prudent valuation of all banking activities would be a sensible start.

4. We need banks to exercise self-control. It’s obvious that current systems for regulation haven’t worked. While some changes are taking place on a national level, there is still not enough international co-operation. On the plus side, the most recent scandals have come to light as a result of regulators investigating and reporting on alleged bad behaviour. But it’s a slow process and is all too retrospective. As always, financiers are innovating ahead of regulators. Bankers hate the idea of introducing excessive regulation on financial markets. And it wouldn’t help the world economy. But they have to show that the financial services industry can take responsibility for its own actions. We don’t need more regulation, but we do need better, more effective regulation. This requires better internal auditing, stronger compliance regimes and more self-control on the part of the banks. To use Diamond’s phrase, we need more banks with a culture where people behave ethically when no one’s watching.

5. Regulators are also subjective. One of the problems the Standard Chartered case has highlighted is that the complexity, power and importance of banking itself means that banking regulation must also be highly complex. It also attracts the attention of some who would seek to use the potential power for other means. The focus of the Standard Chartered allegations on dealing with Iran has led some observers to suggest the claims serve a wider political purpose in the US. While it’s not clear what that purpose might be, other than rubbishing London at the expense of New York, the claim highlights how national best interests are rarely aligned with either individual commercial goals or the wider global good.

6. It’s time for an international banking amnesty. With each revelation of wrongdoing we learn something new about the banks and something depressing about our society. We should waive further fines or punishments if all the banks agree to sign up once and for all to a thorough and totally transparent immediate assessment of all of their books. Like some sort of one-off super-audit, it would allow them to own up now to all the things they would normally like auditors and regulators not to see. We need to know where all the bodies are buried, right across the system.

This article first appeared in economia.

Standard Chartered. Photograph: Getty Images

Richard Cree is the Editor of Economia.

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Cabinet audit: what does the appointment of Andrea Leadsom as Environment Secretary mean for policy?

The political and policy-based implications of the new Secretary of State for Environment, Food and Rural Affairs.

A little over a week into Andrea Leadsom’s new role as Secretary of State for Environment, Food and Rural Affairs (Defra), and senior industry figures are already questioning her credentials. A growing list of campaigners have called for her resignation, and even the Cabinet Office implied that her department's responsibilities will be downgraded.

So far, so bad.

The appointment would appear to be something of a consolation prize, coming just days after Leadsom pulled out of the Conservative leadership race and allowed Theresa May to enter No 10 unopposed.

Yet while Leadsom may have been able to twist the truth on her CV in the City, no amount of tampering will improve the agriculture-related side to her record: one barely exists. In fact, recent statements made on the subject have only added to her reputation for vacuous opinion: “It would make so much more sense if those with the big fields do the sheep, and those with the hill farms do the butterflies,” she told an audience assembled for a referendum debate. No matter the livelihoods of thousands of the UK’s hilltop sheep farmers, then? No need for butterflies outside of national parks?

Normally such a lack of experience is unsurprising. The department has gained a reputation as something of a ministerial backwater; a useful place to send problematic colleagues for some sobering time-out.

But these are not normal times.

As Brexit negotiations unfold, Defra will be central to establishing new, domestic policies for UK food and farming; sectors worth around £108bn to the economy and responsible for employing one in eight of the population.

In this context, Leadsom’s appointment seems, at best, a misguided attempt to make the architects of Brexit either live up to their promises or be seen to fail in the attempt.

At worst, May might actually think she is a good fit for the job. Leadsom’s one, water-tight credential – her commitment to opposing restraints on industry – certainly has its upsides for a Prime Minister in need of an alternative to the EU’s Common Agricultural Policy (CAP); a policy responsible for around 40 per cent the entire EU budget.

Why not leave such a daunting task in the hands of someone with an instinct for “abolishing” subsidies  thus freeing up money to spend elsewhere?

As with most things to do with the EU, CAP has some major cons and some equally compelling pros. Take the fact that 80 per cent of CAP aid is paid out to the richest 25 per cent of farmers (most of whom are either landed gentry or vast, industrialised, mega-farmers). But then offset this against the provision of vital lifelines for some of the UK’s most conscientious, local and insecure of food producers.

The NFU told the New Statesman that there are many issues in need of urgent attention; from an improved Basic Payment Scheme, to guarantees for agri-environment funding, and a commitment to the 25-year TB eradication strategy. But that they also hope, above all, “that Mrs Leadsom will champion British food and farming. Our industry has a great story to tell”.

The construction of a new domestic agricultural policy is a once-in-a-generation opportunity for Britain to truly decide where its priorities for food and environment lie, as well as to which kind of farmers (as well as which countries) it wants to delegate their delivery.

In the context of so much uncertainty and such great opportunity, Leadsom has a tough job ahead of her. And no amount of “speaking as a mother” will change that.

India Bourke is the New Statesman's editorial assistant.