More Zonkyness

This week has been a fun one for those of us who like kicking bankers when they’re down with two stories about banks tripping over their own shoelaces. Firstly there has been the ongoing saga of the IT woes within RBS which caused last week’s inability to process payments, and secondly the story of Barclays helping to “fix” the interbank interest rates – which made all of our loans more expensive.

We are used to these kinds of stories about the banking sector, and many of believe that there is something fundamentally broken about the banking sector. Banking is important to the world economy – our current recessions are due in part to banking incompetence and greed (which definitely triggered it but is perhaps not completely to blame).

If you look deeply at the IT woes of RBS, you begin to see that underneath the story of complicated IT “stuff” falling over there is a hidden story of banking greed. Whilst IT is never infallible, the problems at the RBS data centres may well have been caused, or at least made worse by their recent practices. RBS have been engaged in a programme of making experienced (and expensive) UK-based workers redundant, and replacing them with cheaper (and inexperienced) foreign workers by outsourcing or offshoring (the difference is not relevant here).

It is worth noting that if RBS had made expensive UK-based workers redundant and replaced them with inexperienced (and cheaper) UK-based workers, they would be breaking the law. You do have to wonder why using foreign workers makes it legal!

The article I linked to above does say that in some ways the Indian workers have been doing good work, but they lack experience when working with mainframe-based systems. This is hardly surprising when mainframe-based systems are seen as so old-fashioned, with more weight given to Windows and UNIX-based systems, but experience matters.

Most people with more than half a clue in the IT world know that experienced staff can be particularly valuable – they can oversee the work of others and point out potential issues. And when issues do arise (and they always do), they are more likely to be able to be confident about remedial actions. Perhaps best summarised as they know when to take their hands off the keyboard!

That is not to say that inexperienced staff cannot be made use of – there is no other way of someone becoming experienced after all. But you need a sensible ratio.

If RBS had taken the sensible action of using India-based staff to supplement the existing UK-based staff so that experienced staff were retained until they chose to leave, then we may have seen a different result last week. But of course that would have cost more money.

Now onto the “Barclays” situation. Staff at Barclays (in collusion with staff at other as yet unnamed banks) attempted to influence the interest rates that banks charge each other. These funds available to banks are the source of the loans that most of us make use of – including mortgages, so any effect on the interest rates would have caused the interest rates we pay to go up (or down). It is as yet uncertain whether Barclays staff were successful in influencing the rates or how much the rates were influenced.

But given the size of this market (one figure is quoted as being £225 trillion), even the tiniest influence on the interest rate could make enormous sums of money. If they had artificially inflated the interest rate by just 0.1%, they would have taken their share of in the region of £225 million. And who is to say it was as small an influence as that?

With both stories together, we can see that at least two major banks had management teams in place that encouraged profits over other priorities to an unsafe degree. Whilst the management at Barclays may not have been directly involved in the scams to defraud the public, they were responsible for the culture that allowed staff to pursue profits at the expense of banking ethics, morality, or the law. And RBS management are responsible in a similar way – by extreme cost cutting they put the day to day operations of their bank at risk.

It is perhaps unreasonable to expect bank staff to act ethically. Whilst there are hopefully people who could resist the temptation to help themselves to their share of ill gotten gains, such people are probably pretty unlikely to choose banking as a career. Especially given what we now know about how bankers behave.

There is not an easy answer to this; not even nationalisation would change the embedded culture (after all, RBS is mostly owned by the UK taxpayers), but it would be a good start. And we need to do something about how profits are shared – to make it less likely to tempt someone to make excessive profits at the expense of perfectly reasonable restraints. How about paying bankers bonuses on an equitable share? So that nobody within a bank gets a bonus bigger than his or her colleague?