Barclays or any other bank appropriately provisioned, you must be joking

In a terrific column, the Telegraph's Harry Wilson looks at the banks and sees a host of problems for which there is no chance that banks have set aside adequate provisions for losses.

His list includes credit losses, losses related to customer conduct issues (payment protection insurance and interest rate swap mis-selling), and losses related to manipulating Libor and other interest rates.

Add up all the losses and a cabinet minister concludes that at least one major bank could go under.

What this suggests to your humble blogger is that we have reached the time to stop protecting bank book capital and banker bonuses at all costs.  It is time to adopt the Swedish Model and require the banks to recognize upfront all of their losses on excess debt and non-credit losses.

Banking is really all about risk management. .... judging how much risk to take and when. 

Since the financial crisis, we have learned that most banks were very poor managers of risk.

In the run-up to the financial crisis, we also learned that financial regulators are not good at assessing risk being taken by the banks.  How many times did the Fed say that as a result of financial innovation the risk of the banking system had been reduced?

The combination of these two lessons makes the case for requiring the banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposures.

Using this information, market participants can independently assess the risk of the banks and adjust their exposures based on this assessment.

They lent big, long and more often wrong and the result was trillions of pounds of write-downs and a financial crisis that caused the collapse of several major institutions.

Regular readers know that all of the write-downs have not yet been taken and that there are losses hidden on and off the bank balance sheets.

Confirmation that the banks have losses is provided by the interbank lending market.  Banks with deposits to lend are still refusing to lend to banks looking to borrow because they cannot tell if the borrowing banks are solvent.

Not only this, but their appreciation of reputational risk was woeful. 

Business was done on the basis of short-term profits by bonus-hungry employees that has not only ultimately cost lenders far more than they ever made, but that is continuing to present them with a bill that is only getting larger....

Mr. Wilson makes a very important point.

The lack of appreciation of reputational risk was the result of all the opacity that the bankers created in the financial system.  With opacity to hide their bad behavior, there was no need to think about reputational risk.

For example, opacity allowed the banks to manipulate the Libor interest rate.  Had the banks been required to provide ultra transparency, the bankers could not have manipulated the rate.

However, banks were not required to provide ultra transparency and the bankers were able to manipulate Libor behind a veil of opacity.

The simple truth is that the costs facing Barclays and other major banks for what Santander UK mysteriously described last week as "historic customer conduct issues" are immense. 

Take swap mis-selling. The Telegraph has now written for several months about the growing scandal surrounding the mis-sale of interest rate swaps to SMEs. 

In the early stages of this campaign we were repeatedly told there was nothing to see here.

This is in fact a frequent refrain from bankers.  There are many examples including the mortgage foreclosure related robo-signing scandal.

Of course, there is something to see and what there is to see is always a major problem.

That what we were hearing was only the bleating of a small number of disgruntled businessmen upset at missing out on historically low interest rates. 

Eight months later, and Britain's major banks have so far set aside more than £600m to pay compensation to SMEs and the outcry over the scandal is growing rapidly. 

We are now told that swap mis-selling may be large, but will cost nothing like the more than £10bn bill to the banking industry from payment protection insurance. 

This again is likely to be wishful thinking when you consider the average size of a swap claim is somewhere in the region of £250,000 to £500,000. You don't have to make too many settlements like this to go to a pretty big number.

In the 1930s, the Pecora Commission showed the world bankers will exploit opacity to engage in an endless amount of bad behavior.  What the current financial crisis has shown is that nothing has changed in banker behavior.

And this is before you look at potentially the biggest of them all: Libor-rigging. 

Barclays is the only bank in the world to have admitted it attempted to manipulate the world's key borrowing rate. But with more than a dozen banks around the world under investigation, others will be drawn in. 

Already banks are facing claims from customers in relation to the alleged rigging. Earlier this week, Barclays was slammed by a UK High Court judge in a preliminary hearing of a swap mis-selling case in which lawyers for a care home operator are attempting to argue that because the bank was involved in Libor manipulation the company's contracts should be rescinded. 

If this case goes to court and the company wins then the impact on the industry would be enormous and would have the potential, according to the rumoured private utterances of one Cabinet minister, to bring down at least one major British bank.

The truth is, that when it comes to provisioning Barclays probably has a long way to go before it has accounted for the true cost of its past behaviour.

This could probably be said of all the banks.