Word on the web: Stopping the rot

With banks handed £2.6bn in fines last week for rigging foreign exchange rates, what can be done to change banking culture? Is it a case or weeding out a few bad apples or does the rot go deeper?

Last week HSBC, Royal Bank of Scotland, UBS, Citibank, J.P. Morgan and Bank of America were fined a total of £2.6bn for failing to stop their traders from rigging foreign exchange (forex) rates. It is the latest in a series of scandals that suggests banking behaviour needs a radical overhaul, and many believe fines alone will not do the job. So what else can be done?

Docking pay 
of the forex fines were imposed by the Financial Conduct Authority
The Guardian's Jill Treanor reports on Mark Carney's view that new measures are needed to restore trust in the financial markets. According to the Governor of the Bank of England, the succession of scandals "mean it is simply untenable now to argue that the problem is one of a few bad apples. The issue is with the barrels in which they are stored". 

To tackle these problematic "barrels", Carney has called for institutional change, which could involve docking bankers' salaries, in addition to forfeiting bonuses. "Policymakers have had bankers' pay in their sights since the 2008 crisis," explains Treanor. 

Carney also challenges bankers' arguments that more reforms will damage growth and that financial crises are just something to be expected every five to seven years. "If that were true, we are due for another crisis about now," he retorts. "Does anyone find that acceptable?"

The Guardian story

Further questioning  Meanwhile, Reuter's Kristen Ridley explains further investigations are on the horizon. Ridley says British MPs will now "quiz" top bankers in the wake of last week's deal with regulators, although hearings may not be held until December or the New Year. 

Ridley also notes that Andrew Tyrie, Chairman of the Treasury Select Committee, has "voiced outrage" at the scandal. According to Tyrie, traders in a position to harm employers, clients or markets "should see remuneration deferred for long periods and risk having their licences to practice withdrawn". 

Reuters article 

Automated markets  Jasper Lawler of uk.investing.com agrees that the forex fines lose credibility because they don't hold individual traders to account.

But Lawler controversially suggests that the answer to a better banking culture could lie in taking all traders out of the equation. "The biggest market impact will likely be a faster move by banks towards automation of market-making activities to remove the human element in trading FX and other markets," he says. 

However, he points out that while removing humans "could lower the risk of manipulation", it could also lead to "more of the kind of volatility seen in October; robots just don't seemingly absorb risk in the same way as a human trader might have when sentiment sharply changes direction". 

uk.investing.com piece 

Seen a blog, news story or discussion online that you think might interest CISI members? Email lawrence.cohen@wardour.co.uk

What will it take to bring the banks into line? Let us know your view by taking part in the latest CISI survey.
Published: 21 Nov 2014
  • News
  • Word on the web
  • FCA
  • Behaviour
  • Banking

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