The Business - Patrick Hosking asks if the banks are getting smarter

Higher bank charges, higher insurance premiums, higher taxes or smaller pensions: one way or another

Have bankers got smarter? As company after company is toppled by incompetence, greed or good old-fashioned crookedness, you have to wonder.

The banks would have us believe they have escaped largely unscathed from this, the worst wave of corporate collapses in a generation. Enron may be history and WorldCom on the brink, but the banks that financed their follies are in pretty good health. On this side of the Atlantic, Marconi, NTL and Telewest between them owe tens of billions of pounds, but, again, the banks have barely blinked.

This isn't how things are supposed to work. At this stage of the economic cycle, bankers are usually admitting to disastrous losses, and confessing that loans which seemed a good idea at the time are never going to be repaid. Whether the dodgy borrowers are Latin American dictators, spivvy property developers or overambitious management buyout teams, the outcome is the same: the banks pick up the tab.

Not this time, they insist. I seem to have spent a large part of the past few weeks asking bankers about their "exposure" - their maximum possible loss - to problem companies. The response is almost always the same. On the record, they say, we never comment on our clients. Off the record, we do have an exposure to so-and-so, but it's "absolutely tiny", or "non-material".

Bankers have a different idea of tiny from the rest of us. Barclays sees any individual loan loss of less than £150m as non-material, which means it doesn't have to disclose it. Every day, the Royal Bank of Scotland - the City's favourite since it acquired NatWest - discovers another £4m that will never be repaid. This failure rate is widely applauded as the acme of prudent banking.

Banks will certainly be hit, and some banks - Abbey National springs to mind - more than others. Even so, it is remarkable that, so far at least, most banks have been able to report only collateral damage. Remarkably, too, the stock market believes them. Bank shares are riding high. Five of Britain's ten biggest listed companies are now banks.

There seem to be two reasons for this. One is that the banks are spreading their bets more widely. Sir Peter Middleton, the chairman of Barclays, recently told me that, ten years ago, the bank's loan book looked like the Himalayas, with huge peaks of exposure to certain dicey sectors, notably property. "Now it looks like Norfolk," he boasted. So far, the big defaults are confined to the high-tech sector, notably the telecoms industry.

The second reason is that the banks are passing on the risk to others, in particular insurance companies and pension funds. Growing amounts of corporate debt are incurred through issuing bonds, rather than borrowing from banks. Debts owed by hundreds of different borrowers are packaged up into tradable securities and flogged on. More sinisterly, risk is sold on by the banks through new investment vehicles of byzantine complexity with fancy names such as collateralised debt obligations. The buyers again seem to be the insurers and pension funds. Sir Howard Davies, chairman of the Financial Services Authority, described these instruments as "toxic waste".

Someone somewhere ends up with it. The real worry is that no one knows for sure where the waste now resides. The squabbles have already begun and the lawyers have been unleashed. The only certainty is that we will all ultimately foot the bill - whether it be through higher bank charges, higher insurance premiums, higher taxes or smaller pensions.


Perhaps the most illuminating fact in all the column yards written about the WorldCom scandal was that its ex-chief executive, Bernie Ebbers, was a bully. Dissent was not allowed. Journalists or analysts asking awkward questions were humiliated; Ebbers - all six foot four of him, dressed in cowboy boots - would merely point aggressively to the graph of his rocketing share price.

If Ebbers treated outsiders like that, I dread to think how menacing he could be with his own staff and advisers.

Bullying, alas, works. Robert Maxwell's entire fraudulent career stemmed from his ability to humiliate and terrorise everyone who came into contact with him, including reporters. I recall with shame not daring to ask a question at one of his press conferences. (He had banned the Independent, then my paper, over some now forgotten slight, and I hid spinelessly in the back row, fearful he would throw me out.)

Business literature sometimes gives the impression that modern companies are meritocratic places where employees are encouraged to say what they really think; where subversive views are encouraged; where auditors and other advisers are not afraid to come up with unpalatable views. Some may achieve these high standards. Yet I would say that at least one in three public companies in Britain is run by someone who could fairly be classed as a tyrant. In unquoted companies, the proportion would be higher still.