By James Saft
(Reuters) – Bob Diamond’s gift to the UK, perhaps a parting one, is that he has managed his bank badly enough to provoke real reform but, perhaps out of luck, not so badly as to blow up the whole economy.
That Diamond should go is obvious; that he hasn’t is further evidence of why he should.
Not that Diamond, the CEO of Barclays Plc, has made the case for root and branch reform all on his own. While Barclays has been heavily fined in the UK and U.S. for submitting fictitious borrowing rates to the key LIBOR and EURIBOR panels, it is very likely that it was not alone, either in masking its weakness during the height of the crisis or in manipulating figures for gain in good times. Nor was the bank alone in the further scandal of mis-selling complex and destructive interest-rate swaps to small businesses, a plea it copped along with HSBC, Lloyds Banking Group PLC and Royal Bank of Scotland Group Plc.
This represents a golden opportunity for the UK, a chance to harness public outrage in the service of reform before its banking system, as it very well may someday, causes a crisis too big for the state to handle. Think on this: Barclays’ balance sheet is about the size of annual UK GDP, and the balance sheet of the system of the whole is several times that. At the same time, as recently as the end of last year, median UK bank leverage was still well above 20 times capital, meaning that a typical bank might be rendered insolvent by a decline of less than 5 percent in the value of its assets.
And don’t be fooled by Britain’s AAA rating, already on review for downgrade by several ratings agencies. It, like Iceland, Ireland, Greece and Spain before it, could find itself with a banking crisis it cannot bankroll.