Sir Mervyn King stopped short of calling for a Leveson-style inquiry into past practices at Britain's banks but said there needed to be a "real change in culture" as a consequence of successive scandals.
"From excessive levels of compensation, to shoddy treatment of customers, to a deceitful manipulation of one of the most important interest rates and now news of yet another mis-selling scandal, we can see we need a real change in the culture of the industry," he said.He added that hard-working bank staff had been "let down" and that banks now needed "leadership of an unusually high order".
Sir Mervyn said there also needed to be a change in the way Libor was calculated based on "observations of actual market transactions" rather than getting banks to supply rates. "The idea that my word is my Libor is dead," he added.
It was last night reported that Barclays' compliance department failed to act on three separate internal warnings between 2007 and 2008 about conflicts of interest and "patently false" submissions by its staff to the panel that sets the benchmark interest rate used to price mortgages worldwide.
Sir Mervyn's resistance to a public inquiry was echoed by senior Government sources. Ministers are leery of instigating for an inquiry because they believe it would be a distraction for the industry at a time when ministers want the efforts of the banks to be focused on supporting the economy. The Treasury is also looking to strengthen criminal sanctions for those responsible for market abuse after the Financial Services Authority exposed the dealings at Barclays.
But the Business Secretary, Vince Cable, left the door open when he said he had "nothing fundamentally against" the idea. "We are trying to clear up a massive cesspit and we have got to deal with it through tough regulation, through taxation and through legislation separating out the casinos – the investment banks – from the ordinary retail banks," he said. "I don't have any strong objection to it [an inquiry], but I'm not sure how it helps us really."
Speaking from Brussels, David Cameron said that people were "rightly angry" about the behaviour of the banks but stopped short of agreeing to an inquiry. "People want to see real accountability for what has happened. When people have broken the rules, they should face the consequences, and this needs a change of culture," he said.
"I know that Bob Diamond has quite rightly agreed to appear before the Treasury select committee."
Asked whether Mr Diamond remained the right person to run Barclays, Mr Cameron said: "I can't say that. As I say, he has got questions to answer."
The shadow Chancellor, Ed Balls, said the Libor scandal had exposed "a real cultural problem". He said that it was wrong for the Government to say there had been enough inquiries. "There is now a case because we can't just brush this under the carpet. People are shocked by the swaggering arrogance of what we've discovered in the last 24 hours, and we really need to open this wide open."
Libor: How King liked to joke about rates
The Governor of the Bank of England, Mervyn King, has joked about the unreliability of the Libor rate since the credit crunch.
He was fond of telling economic reporters: "Libor – the rate of interest at which big banks don't lend to each other."
An investigation into Libor rigging could have been launched by the Serious Fraud Office last summer. But the agency opted against a probe as it would have been a drag on limited resources.
What will save the City? Our experts give their views
Hamish Mcrae: Structural changes can have a major effect
So how do you "re-moralise" banking? There is a temptation to see the multiple failures of the global banking system as something so huge that it will be nigh impossible for society to fix – particularly since tighter curbs on banks mean a cut in their lending capacity and accordingly slower economic growth.
Yet there are many examples in history of financial excesses where the authorities had to impose changes on the industry that have resulted in a better service to society as a whole.
One example was the string of changes on the London Stock Exchange in the 19th century forced on dealers ripping off their clients by cheating on the prices at which they bought and sold shares – a pretty similar activity to the cheating over Libor by the banks. These included the split between jobber and brokers, with jobbers making the market in the securities and brokers acting on behalf of clients. This lasted until the "big bang" reforms of 1986, when the UK adopted the global standard of investment banks doing both functions.
Another example was the Glass-Steagall Act in the US in 1933, which split investment banking from commercial banking. We are clearly moving back some way towards that, though anyone who characterises the former as "casino banking" and the latter as boring and safe should note that virtually all the losses by the banking industry have been on commercial banking, mostly lending on property. The act was repealed in 1999.
So history teaches us that financial excess needs to be curbed and can be curbed. It also should teach us something else. Politics can encourage excess. It was US politicians that encouraged the sub-prime lending boom. And it was European politicians that created the "one size fits all" single euro interest rate that fuelled the Irish and Spanish property booms. They carry some of the blame too.
Anthony Hilton: 'Put loyalty to customers before your own profit'
There was a time when new recruits to banks were told that in order of priority they had to put the interests of the customer first, the bank second and themselves third. Today that order is reversed.
It all started to go wrong 20 years ago when we imported the American idea that business was only about making a profit. The logical next step was to give key employees extra money if they could boost revenues.
The mistake was to assume that a bonus would make people work harder when it simply makes them work differently. Customers got exploited, services got cheapened, ever bigger risks were taken. And it seemed to work because profits appeared to go up, but we now know this was only because the long-term cost – the undermining of the integrity of the business – stayed hidden until it erupted into the full-blown crisis we now have. Today's problems will not go away as long as the bonus culture and the blind pursuit of short-term profit remains. The second big issue is that banks, unlike normal businesses, are built in a way which encourages bad behaviour. They are allowed to act as both agent and principal: they can advise the customer on a course of action, and profit from what the customer decides to do. So they advise the customer to do what makes them money regardless of whether it is actually in the client's interest. They should be forced to choose which side of the fence they want to be.
Finally they are too big, which means that top management has no idea what actually goes on to deliver results. Rupert Murdoch had the same problem and the result was phone hacking. He has now decided to break the business up into more manageable units. That probably is also the long-term solution for banks.
Anthony Hilton is a City commentator
Philippa Foster Back: Bank bosses must impose an ethical culture
All business depends upon trust and goodwill in order to flourish. As recent revelations have shown, it is clearly important that business is conducted in an open and honest manner – otherwise trust is eroded, share prices drop and businesses fail.
Ethical values need to be put at the heart of the way banks do business. Compliance is not enough, it is the spirit of "doing business ethically" which needs to be embedded within day-to-day commercial activities.
To achieve a culture-change of this magnitude, they must start by training all staff (from the board down) in what it means to be ethical and to embed ethics into decision-making.
Offering training in how to solve ethical dilemmas can not only give practical tools for staff but also sensitises them to issues which may arise. This training needs to be face-to-face in order to be effective in influencing behaviour – a quickly rolled-out e-learning programme will not reach the difficult issues.
The importance of leadership should never be underestimated. The culture of an organisation is set by the "tone at the top" whether that is senior management or team leaders. Leaders who talk about ethical issues, support staff and behave in an open and transparent way, send the message to all employees, and the wider world, that ethics is taken seriously.
Banking staff need to know that they will be supported in any decisions they make which may have short-term negative financial implications, but long-term positive ethical ones. A culture of openness will also support staff who speak up about any concerns they may have about ethical behaviours.
Philippa Foster Back OBE is director of the Institute of Business Ethics
Vicky Pryce: Keep bonuses but change how they are awarded
The details of the latest revelations of unethical behaviour among banks suggest that there is probably a limit to what regulation and enforcement can do to curb these types of practices. Effective change can only be achieved by altering the the ingrained culture of so many institutions, which is often fed by perverse incentives.
In my view one of the remedies is to look again at the ownership structure by encouraging more partnerships and hence a "mutualisation" of risk within an organisation. This would act as a barrier to underhand and non-transparent behaviour. It would remove the principal/agent separation which allows managers to act in their own interests rather than the ones of the owners of the business. The remuneration structure that executives vote for themselves often rewards excessive risk-taking and can encourage unethical behaviour in the process. The downside if they lose is borne mostly by the shareholders. A system which saw the risks shared and borne by all would limit this.
However this ownership structure isn't possible in all cases( such as big retail banks) so a change in the rewards mechanism across the board is a must. Bonuses should still exist and should be variable so as not to lumber firms with big fixed costs that they are unable to shift quickly in a downturn. But there should be no stock options that encourage the manipulation of share prices, no "super rewards" if your team has done well while others suffered or when the organisation as a whole has done badly. And no bonuses at all if there is a lack if transparency to the board in relation to what products or services a team is selling and how profits were made, even - in fact particularly, if they look impressive.
And throughout all this the board must remain ultimately accountable.
Vicky Pryce is a City economist and former Joint Head of the UK Government Economic Service. She is also a founder member of GoodCorporation.
Andreas Whittam Smith: Make bankers sign codes of conduct to restore ethics
First there has to be a wake-up call. This would be achieved if the boards of the offending banks dismissed their chief executives without compensation. Second, as the bad behaviour of the banks has become a chronic condition, the remedies must be correspondingly severe.
Individual banks must draw up codes of conduct for themselves that are approved by the Financial Services Authority. The use of codes of conduct is common practice in the public services. NHS boards must observe both a "code of conduct" and a "code of accountability", which between them cover behaviour and governance. Banks must be compelled to do the same.
These bank codes should give primacy to integrity and to acting in good faith. They should describe duties towards customers, the public interest and the bank itself. Agreement must be a condition of employment. From the chair of the board down to the most junior member of staff, every bank employee must be required to indicate assent by means of a signed statement.
In addition, the role of the compliance teams within banks must be strengthened. Gaining the approval of "compliance" for the development of new business products should be mandatory. Compliance should also have to approve the incentive elements of remunerations packages to make sure that they didn't encourage bad behaviour. The head of compliance should always be a main board director and should have the right privately to warn the chair of the board and the FSA if concerns remain unsatisfactorily resolved.
Finally banks must explain to their staffs that there is a role for whistleblowing; that if members of staff believe there is malpractice or wrongdoing happening in a workplace then they should "blow the whistle" on the behaviour and know that they will be protected from losing their job and/or being victimised by management or other staff members.
Andreas Whittam Smith is a financial journalist and a founder of The Independent.
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