Did the UK banking sector really commit £20.2bn worth of villainy in 2012?

Massive penalties for banks are becoming business as usual.

A couple of weeks ago, I pointed out that the financial results the media most cares about in a post-2008 world are fines and bonuses, rather than profit or turnover.

In the circumstances, I was talking about how any attempt to find something worthy of outrage in Google’s fine or bonus totals was trivial in the context of the digital behemoth’s bottom line.

Now, however, the availability of full year results from the UK’s major banks has prompted KPMG to agree that the numbers connected with reputational capital are now central to banking performance – and not in any woolly long-term sense, but in the here and now.

According to the report, while 2012’s “core profits” for the UK’s Big Five (Barclays, HSBC, Lloyds Banking Group, RBS and Standard Chartered) were up 45 per cent up year-on-year due to lower bad debt and steadier investment banking performance, “regulatory fines, customer redress provisions and the accounting consequences of improved creditworthiness” had in fact blown statutory profits in the other direction, to a level 40 per cent lower than the previous year.

This round of snakes and ladders, according to KPMG, made the difference between a combined core profit of £31.5 bn, and actual statutory profits of £11.7 bn.

Before concluding that the UK banking sector committed £20.2bn worth of villainy in 2012, it must be pointed out that the “key snakeholder” in this set of adverse events, at £12.8bn, was in fact the “accounting consequences of improved creditworthiness” – eg a downward revision of post-tax profits due to the revaluation of "own debt" in the context of increased financial health.

Ironically in this regard, banks were making better profits when they were less creditworthy. But that’s financial reporting for you.

But even taking this into account, KPMG identified around £12bn* of profit modifiers linked directly with misbehaviour, including the PPI mess, the Libor scandal, the mis-selling of derivatives products to SMEs, and weaknesses in anti-money laundering measures.

In a headline statement, the head of KPMG’s EMA Financial Services practice, Bill Michael, said banks had had “a dire year” in reputational terms, adding that the sector’s number one priority at this stage should be “restoring public trust.”

A quick look at the related headlines under any article covering the KPMG report underlines Michael’s point succinctly:

“JP Morgan accused of hiding losses”, “More than 500 bankers paid £1m-plus”, “UBS banker gets $26m 'golden hello'” (feel the acid dripping from those quote marks). “Barclays gets caught out by $900m trade”, “bosses handed £40m bonus pot” – the list could go on for paragraphs.  

With these “exceptional events” becoming everyday occurrences for an increasingly jaded customer base, one has to wonder whether the sector is capable of reinventing its behaviour from the ground up, or whether it would be better off just considering the regular imposition of massive penalties to be business as usual.  

* According to KPMG, the £20.2bn difference in core and statutory profit was a net figure, comprising around £24.8bn in negative modifiers, and £4.6bn in positive ones.

Fireworks from KPMG. Photograph: Getty Images

By day, Fred Crawley is editor of Credit Today and Insolvency Today. By night, he reviews graphic novels for the New Statesman.

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What type of Brexit did we vote for? 150,000 Conservative members will decide

As Michael Gove launches his leadership bid, what Leave looks like will be decided by Conservative activists.

Why did 17 million people vote to the leave the European Union, and what did they want? That’s the question that will shape the direction of British politics and economics for the next half-century, perhaps longer.

Vote Leave triumphed in part because they fought a campaign that combined ruthless precision about what the European Union would do – the illusory £350m a week that could be clawed back with a Brexit vote, the imagined 75 million Turks who would rock up to Britain in the days after a Remain vote – with calculated ambiguity about what exit would look like.

Now that ambiguity will be clarified – by just 150,000 people.

 That’s part of why the initial Brexit losses on the stock market have been clawed back – there is still some expectation that we may end up with a more diluted version of a Leave vote than the version offered by Vote Leave. Within the Treasury, the expectation is that the initial “Brexit shock” has been pushed back until the last quarter of the year, when the election of a new Conservative leader will give markets an idea of what to expect.  

Michael Gove, who kicked off his surprise bid today, is running as the “full-fat” version offered by Vote Leave: exit from not just the European Union but from the single market, a cash bounty for Britain’s public services, more investment in science and education. Make Britain great again!

Although my reading of the Conservative parliamentary party is that Gove’s chances of getting to the top two are receding, with Andrea Leadsom the likely beneficiary. She, too, will offer something close to the unadulterated version of exit that Gove is running on. That is the version that is making officials in Whitehall and the Bank of England most nervous, as they expect it means exit on World Trade Organisation terms, followed by lengthy and severe recession.

Elsewhere, both Stephen Crabb and Theresa May, who supported a Remain vote, have kicked off their campaigns with a promise that “Brexit means Brexit” in the words of May, while Crabb has conceded that, in his view, the Leave vote means that Britain will have to take more control of its borders as part of any exit deal. May has made retaining Britain’s single market access a priority, Crabb has not.

On the Labour side, John McDonnell has set out his red lines in a Brexit negotiation, and again remaining in the single market is a red line, alongside access to the European Investment Bank, and the maintenance of “social Europe”. But he, too, has stated that Brexit means the “end of free movement”.

My reading – and indeed the reading within McDonnell’s circle – is that it is the loyalists who are likely to emerge victorious in Labour’s power struggle, although it could yet be under a different leader. (Serious figures in that camp are thinking about whether Clive Lewis might be the solution to the party’s woes.) Even if they don’t, the rebels’ alternate is likely either to be drawn from the party’s Brownite tendency or to have that faction acting as its guarantors, making an end to free movement a near-certainty on the Labour side.

Why does that matter? Well, the emerging consensus on Whitehall is that, provided you were willing to sacrifice the bulk of Britain’s financial services to Frankfurt and Paris, there is a deal to be struck in which Britain remains subject to only three of the four freedoms – free movement of goods, services, capital and people – but retains access to the single market. 

That means that what Brexit actually looks like remains a matter of conjecture, a subject of considerable consternation for British officials. For staff at the Bank of England,  who have to make a judgement call in their August inflation report as to what the impact of an out vote will be. The Office of Budget Responsibility expects that it will be heavily led by the Bank. Britain's short-term economic future will be driven not by elected politicians but by polls of the Conservative membership. A tense few months await. 

Stephen Bush is special correspondent at the New Statesman. He usually writes about politics.