Banking industry ‘broke its commitment to the public’

Addressing the British Bankers’ Association’s annual conference, Mr Tucker said the banking industry broke its commitment to the public during the financial crisis, and now must work hard to regain its faith and avoid another taxpayer bailout.

However, Barclays chairman Marcus Aguis insisted trying to remove risk from banks as part of this rebuilding will not work. “Banks cannot and will never be risk-free,” he said. “The idea of a risk-free bank is an oxymoron.”

Mr Tucker said a social obligation between banking and the public – to provide liquidity to keep the economy flowing, ensure proper regulation and contain the cost of a bank’s failure – did not survive the crisis.

“In pretty well every dimension, that social contract was found wanting,” said Mr Tucker.

“The regulatory regime was revealed to be riddled with design faults... A number of countries, including most painfully the UK, were exposed as lacking regimes for absorbing the failure of even middle-sized banks.

“And no country was in a position to cope with the failure of its largest and most complex banks and dealers.”

Mr Tucker said as part of their rebuilding, banks must put aside more of their profits for a rainy day, to help avoid a repeat of the credit crunch when lenders hoarded capital, thus strangling the flow of credit to businesses and homeowners.

“When the sun is shining over the next few quarters, when banks make buoyant profits, we believe they should retain more of these profits.

“This is to do with replenishing capital rather than lifting capital ratios.

“The goal is to move towards a system that is able to keep lending even during dark times.”

However, Mr Agius, who is also chair of the BBA, argued tighter rules on capital risk damaging banks’ business models and making them uncompetitive.

“Some regulators seem to believe that ever more capital is the solution to every regulatory problem,” he said. “At the extreme, banks would become over-capitalised and therefore unable to earn a sufficient rate of return on that capital. This would make them unattractive investments for private investors.”

He added forcing banks to de-leverage to achieve higher capital targets could result in customers being denied credit – dangerous at a time when more lending is needed to stimulate the economy. The cost of banks’ services could also be pushed up, he warned, as lenders try to make a fair return on their capital.

“More capital may reduce the probability of a bank failing, but it can never reduce this probability to zero,” he said.

Mr Agius told the conference of more than 300 senior bankers, advisers, analysts and regulators that they must do more to encourage demand for credit.

“Banks want to lend. It is in our DNA.

“It is our duty as bankers to help customers regain that confidence. And it is up to us to stimulate demand for credit.”

The Government-appointed Independent Commission on Banking is currently drawing up plans on how to reform the sector and make it more competitive and safer.

Its interim proposals have suggested forcing banks to ring-fence their retail operations from their investment arms.

Andrew Tyrie, chair of the Treasury Select Committee, said the debate should be held in public, to avoid damaging its credibility, with scope to reject ring-fencing if necessary.

“(It is) the most far-reaching inquiry into the structure of banking in living memory,” he said. It will influence relations between bankers and politicians for decades.

“If arguments against ring-fencing are strong and persuasive, we should not implement them.”

However, bankers were also given a dressing down by Natalie Ceeney, chief executive of the Financial Ombudsman Service, who highlighted banks’ delay in admitting their failures over the mis-selling of payment protection insurance (PPI).

The BBA recently lost a High Court battle over the scandal, which could cost Britain’s banks £8bn.

“It’s important that banks make significant changes to the way they process and handle complaints – in order to build consumer confidence,” she said.

Look to booming economies

The financial services industry was urged to look to the booming economies of Asia and South America as the focus shifts from recovery to growth.

Douglas Flint, chairman of HSBC, told the British Bankers’ Association conference increasing Chinese domestic consumption will rebalance the world’s economy.

With Chinese consumers being urged to shift from saving to spending, he said the sector must seize opportunities in trade financing.

“We are going to see an evolution in trade patterns with huge growth between emerging markets.

“We’re likely to see a southern silk road between Asia, Africa and South America.”