Bob Diamond sets high bar for bank rehabilitation

November 4, 2011

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Peter Thal Larsen

Bob Diamond has discovered humility. Ten months after he declared that the period for banks to show remorse was over, Barclays’ chief executive has acknowledged the need to rebuild trust. Though the change of tone is refreshing, he must now demonstrate that reality reflects the new ideal.

Diamond’s attempt to place banking in a broader social context is welcome – and overdue. His thoughtful lecture on Nov. 3 offered a defence of how and why banks take risks. He explained how they facilitate payments; transform short-term deposits into long-term loans; and smoothe out fluctuations in currencies and commodity prices. These may seem like statements of the obvious. But banks do a poor job of explaining their purpose. Few chief executives are willing to speak out in public. Those that do have tended to rant against regulation, or made veiled threats to relocate their businesses overseas.

That said, many of Barclays’ past actions are hard to reconcile with Diamond’s newly-stated tests of serving social purpose and meeting real client need. Just think of mortgage borrowers persuaded to take out superfluous payment protection insurance. Or the Barclays unit that specialised in structuring aggressive tax arbitrage schemes. And while a court in March dismissed a claim that Barclays had mis-sold derivatives to a small San Marino bank, the case raised serious questions about whether the lender had its client’s best interests at heart. Diamond’s credibility will depend on how he goes about stamping out such behaviour – and how he deals with delinquents.

Regaining public trust also requires two other big changes. First, taxpayer bailouts must end. Diamond agrees that no public money should be put at risk when a lender fails. But the reality is that regulators are still a long way from being able to safely wind down a large, complex bank like Barclays.

The second issue is pay. This is particularly touchy for Diamond, whose outsize bonuses have long been a source of public envy and anger. He insists that banks have to be competitive when recruiting staff. Meanwhile, the industry’s rapidly dwindling profitability means compensation is bound to be squeezed. But bonuses remain one of the main barriers to reconnecting banks with the public. Unless Diamond tackles this issue, any other improvements could easily be overlooked.

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