It’s always been easy to be angry with Barclays Bank. My campaigning goes back to the 1970s when Barclays were a target for the anti-apartheid movement (and rightly so). The past day has provided yet more ammunition for those who would like to single out this bank for attention, and I admit that I have been one of them since that has been what the media has demanded. And yet, we need to stand back and be calm (to misquote the famous poster).
Of course Barclays has admitted to a serious allegation. They helped rig markets. It is likely that ordinary people paid the cost of that manipulation. It is impossible that senior management did not know about this, but it is likely that they will walk away largely unscathed from the whole debacle, their bonuses apart.
It is however important to put this in context. Barclays was not alone in rigging this market. Indeed, they could not have done it alone. This failure was not, therefore, a failure of a particular bank. It was a failure of the banking system.
It is also very clear now that regulators knew about this failure by 2006, at least, and yet it has taken until 2012 for the first penalty to be imposed. There has, therefore, been a failure of the regulatory system as well, and a systemic one at that. The question is not therefore whether Bob Diamond should go (he should, very obviously) or whether Barclays and other should be prosecuted (as seems possible to me under section 4 of the Fraud Act 2006); the real question should be what causes systemic failure, and what can we do about it. The answer to that question is to first of all change regulation and secondly to change the nature of banking. In both cases the reason for change is a simple one, which is that the existing models of both banking and regulation are based on false hypotheses.
As Lord Turner reported in his 2009 report on the financial crash, regulation at the Financial Services Authority was based on the assumption that the efficient market hypothesis held true (page 39, here) He realised then that this was not true. Perhaps most importantly, two assumptions the FSA made, which were that market prices are good indicators of rationally evaluated economic value and that market discipline can be used as an effective tool in constraining harmful risk taking can now be seen to be not just wrong, but that they were fundamentally flouted by banks rigging prices and manipulating markets to mitigate their risk at cost to others.
No wonder we had a crash: regulation assumed a bunch of innocent price taking banks all subservient to the market when nothing could have been further from the truth. It’s an unfortunate fact that regulation will have to be rebuilt on the basis that markets can’t be trusted and regulatory intervention will have to be the norm, not the exception. The era of "light touch regulation" has to be over.
That has implications for the structure of banking too. The assumption that they can be trusted is also implicit in the Vickers recommendations. Their suggestion that banks can be split under common ownership is dependent upon the belief that Chinese walls will be respected. It’s now clear that banks do not respect rules. More than that, manipulation between departments who were not meant to talk to each other was clearly commonplace at Barclays, and presumably elsewhere. On that basis Vickers has now to be consigned to history: the only way forward is to break banks up with high street and investment banking operations separated, for good.
So far we’ve wasted four years since the crash doing nothing to address the problems in our banking system. If this latest Barclays debacle does anything it suggests that the time for prevarication is over.