Categories: Credit Crunch / Crisis management / Trust and reputations
28 June 2012
Assessing the Barclays Bank Libor scandal
Barclays Bank has to pay a penalty of £290 million to the Financial Services Authority in the UK, and the Commodity Futures Trading Commission and Department of Justice in the US. Its crime? Between 2005 and 2009, it lied to them about the interest rate it was paying to borrow money. The reason? To benefit the bank’s derivatives trading positions by either increasing its profits or minimizing its losses. What can we PR pros say?
Foremost: if trust is at the heart of banking, this gross misconduct, which involves more banks than Barclays, strikes at the soul of trust.
It does not take a PR expert to spot that the banking industry has poor corporate governance and supervision. It doesn’t take a PR expert to recommend that the banks must rediscover their ethics and professionalism on the trading and top floors.
The major problem that needs addressing is that derivatives were meant to be part of the risk limitation business. But during both boom and bust times, the finance industry’s risk management instruments became the main source of risk, avarice and dishonest sneakiness, because they (in multiple variations) became the main source of profit. For many years, the big banks repackaged financial products, such as in mortgage backed securities, before reselling them to each other in increasingly overvalued opaque packages. Then when that game collapsed, some of them began fiddling Libor (London Interbank Offered Rate) to keep the derivatives business afloat.
The solution to the latest scandal – besides the requisite defenestration, renewed apologies and promises to do better in future – requires the banking industry to get to grips with how to make money from resolving problems in the real economy. They have to start lending again. They have to be prepared to share risks with needy businesses. That particularly applies to providing credit to small- and medium-sized firms that add value to society; not least because big companies are sitting on massive cash surpluses while they wait for consumer and investor confidence to remerge. Banks, of course, also need to balance their risks with the interests of savers and shareholders.
In other words, banks have to be seen to be doing their bit to make the credit crunch history. Then, and perhaps only then, will PR professionals be in a credible position to communicate to the public on the banks’ behalf the Ws: what, who, when, where and why.
That shouldn’t stop banks from continuing to defend their reputations in the here and now, even if necessarily they must be contrite. They’ve made mistakes, sure. But banks should not take all the blame – or become a scapegoat – for creating the recession. They were just one part of a much bigger picture and problem. They need to keep spelling out the wider issues in all their subtleties; otherwise the banking industry’s role in society cannot be put into perspective. They need to remind everybody that the world needs bankers and banking. At the same time, to illustrate change, they must provide contemporary proof points of why that’s so.
As it stands, bankers are caught between two opposing perceptions: bankers think their elite status as experts, justifies their salaries and bonuses; the public, and most of the media, based on recent experience, regards them as being incompetent and untrustworthy bigheads. That’s not a trivial difference of opinion. Yet it remains well within the realm of possibilities to overcome the polarisation.
My take home message is, if PRs want to justify a seat in the banking boardroom they must spell out how – to restore the reputation of banks – they must refocus their business model. Meanwhile…there’s talk of criminal charges!
Hearing the banking representatives on the radio yesterday, the line toddled out was that the culture has changed already. This is pure denial of the problem and smacks of PR advisors advocating a sticking plaster rather than rolling up the sleeves, telling some hard truths to those in power and recommending tough lessons that need to be learned and adopted.
A few things strike me over banking and reputation.
1. How far the banks have fallen from the trusted pillar of the local society. The bank manager whose name and face were known in a community. It probably isn’t feasible to go back to those days – and it was a tough and inconsistent era for anyone seeking to get a mortgage or other financing. But, banks need to get back to having a genuine connection with the public. That doesn’t mean huge CSR projects or sponsoring the Olympic torch parade, but understanding local businesses, engaging with issues affecting SMEs, helping to educate the young on finance (and not just as future customers) and being able to make local decisions.
2. Those involved in risk need to be as sharp on ethics and morality as they are on understanding money matters. This probably means getting them away from the computer screens where numbers are impersonal and making face-to-face contact. They need to realise the impact – and feel it – of their decisions.
3. There need to be measures other than salary of success. The creation of an elite race of high paid gamblers in the banking industry caused all sorts of knock on effects on other salary grades. That in turn drove pressures to increase income and profit over any other metrics of longer term success.
I think PR can play a role in all these areas – but not if its highly paid advisors (in-house and consultancy) aren’t able to recognise truths and convey these to the management, the high flying wideboys and the mass of beleagured banking employees.
There is an unprecedented amount of restructuring going on in the investment banking industry. The good days are over, and with new legislation in place the industry’s margins has been squeezed practically to zero.
A lot of the bread and butter sources of income have dried up, and only the biggest and most sophisticated of banks will survive through economies of scale to stay in this business. As a PR in such an organisation expect to be busy, justifying the bank’s operations.
The rest may find it wiser to go back to basics, excise their suppurating wounds, return to responsible banking, provide the best customer service and low dividends.
Heather, I think we agree: banking – unchecked – encourages abstractions that obscure real world realities and morals. And part of the solution is for banks to get back in touch with reality (customers) and to start solving real world problems, instead of creating them…that’s a viewpoint the Governor of the Bank of England expresses clearly with his call for a change of culture led by leaders of quality.
Edward, I agree the trend is as you describe. But … I’m not against banks making huge profits from lucrative deals that generate high margins….my point is that banks have to seek to achieve that by lubricating the real economy, because then we all benefit.