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Coffee House

The perverse consequences of punishing the banks

29 July 2014

5:20 PM

29 July 2014

5:20 PM

Lloyds Banking Group is to pay fines of £218 million for fixing interest rates including Libor (the rate at which banks lend to one another) the Financial Conduct Authority and US Commodities and Futures Trading Commission have announced. The FCA described the behaviour as ‘serious misconduct’, and Bank of England Governor Mark Carney said the rigging was ‘reprehensible’. Lloyds follows in the footsteps of Barclays and RBS which have also been fined for market manipulation. But should the banks be punished for their transgressions? In February, The Spectator‘s business editor, Martin Vander Weyer, asked whether fines might weaken the banks we want strengthened, and whether they might hit us rather than the banks. Here’s what he said:-

As with allegations against elderly celebrities of groping long ago, there must come a point when it is counterproductive to go on pursuing banks for every last instance of market abuse during the decade of folly. The tally of penalties on both sides of the Atlantic for Libor-fixing and product mis-selling continues to grow, as attention now turns to allegations of collusion and manipulation in foreign exchange markets by at least nine major banks. Martin Wheatley, head of the Financial Conduct Authority, has said that the forex scandal is ‘every bit as bad as Libor’, and another multi-billion round of fines is expected.

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Of course wrongdoing must be chased, and no one has yet made a case for an amnesty to draw a line under a past era — because no one believes it can’t happen again. But some of the consequences are perverse. On the positive side, £10 billion of compensation for mis-sold ‘payment protection insurance’ boosted consumer spending last year. On the negative, money paid in fines is a deduction to bank capital that might otherwise be available, suitably multiplied, for lending to businesses — and relentless investigative zeal makes it tough for the sector as a whole to regain trust and play a positive role in a recovering economy.

Most perverse of all, as Spectator reader Andrew Fraser pointed out in a recent letter to the FT, fines are borne by bank shareholders but not by executives, who continue collecting giant bonuses. ‘If [fines were] properly assigned to the individuals responsible,’ wrote Mr Fraser, ‘no other measure could assure more responsible behaviour more quickly.’ An important point — and one that should be part of a wider review of how better to build an honest, productive financial community for the future.

This is an extract from Martin Vander Weyer’s ‘Any Other Business’ column in the 22 February 2014 issue of The Spectator. 

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