The Great British banking bust-up

The financial and reputational cost to the banks from the latest scandal is so far uncertain

At the end of last week, friends and family said farewell to Sir Thomas Risk, who died at the end of June, aged 89.

As governor of the Bank of Scotland during the 1980s, he represented a past era of finance, when the company he led could rack up growth and profits, and it could innovate, without sacrificing on ethics and trust.

He was drawn into the heart of the Guinness scandal, presumably because he trusted Ernest Saunders. Wrongly.

The passing of an honourable banker comes at a time when the question is: who can be trusted in finance now? At least one giant bank - probably several - systematically lied about borrowing rates.

It's still not clear who has been the loser from that Libor scandal, but you can be sure lawyers - led by American litigators - are already crawling all over the implications of London-set interest rates costing clients, potentially, billions.

Scunner factor

The compensation bill will add to the losses on dud loans and investment in toxic assets, and the repeated mis-selling of financial products.

But this one is different, both for the uncertainty over the scale of the losses - they could be unlimited - and because it is a powerful focus for the public scunner factor at bankers.

There's no need to rehearse all that. The impact may not be measurable yet, but the anger is palpable. Parliamentarians are voicing it, bidding up the stakes in how much the bankers must be made to pay.

Labour leader Ed Miliband now wants 1000 branches put on the market, to allow at least two challenging newcomers in.

This is despite Lloyds Banking Group struggling to find a buyer for the 632 branches it was told to put on the market by the European Commission.

The Co-op may, at last, buy those. But it isn't new to the high street, any more than Santander, which is buying the chunk of business that RBS is being forced to sell.

Foreign banks have retreated from UK retail market since the financial crisis, and one ambitious attempt to create a new bank by buying up assets, NBNK, has just decided to wind itself up.

Broken Barclays

What's been little discussed in recent days is how badly this could weaken banks' management, focus and core business.

Barclays has lost its top three managers, even if the chairman is still temporarily there to find replacements.

I haven't heard anyone mourning, but Moody's threat of a downgrade cited the lack of leadership in sorting out its current mess.

What of the senior managers in other global investment banks, now looking on in terror as they see that their time in the public stocks, and perhaps in the courts, may not be far away?

Barclays may have thought there was a 'first-mover' advantage, co-operating with regulators and moving on as swiftly as possible, but it's not looking such a smart strategy now.

Where once it appeared to have maximised the synergies from the retail and investment parts of its operations, and (narrowly) avoided state bail-out, its board is now looking at far more serious disaster-management, and perhaps at the case for splitting retail from Barclays Capital.

Broken trust

That could pre-empt further action from governments and regulators to make a clean split between investment and retail banks.

A half-way house of ring-fencing is being introduced, in the wake of the Vickers Report, though not going quite as far as that banking review proposed.

Yet having seen much of the expert comment since the Libor scandal broke, I struggle to recall anyone who thinks that division goes far enough.

It seemed adequate to create Chinese walls, built around separate accounting, separate capital buffers, and on trust.

But trust is precisely the commodity now absent from the debate about the future of the banks.

That's what undermines the efforts of banks to warn of the impact of greater capital requirements, increasing their costs and making it more expensive to lend.

Indeed, it undermines all the lobbying efforts of the banks.

And if the public and political mood is that they've got everything and anything that's coming to them, it leaves big questions about what shape banking will be in.

As customers of RBS's Ulster Bank know better than anyone, we need banks to do the basic things reliably. As many other businesses know, the promise of more business lending is of little value if the conditions being imposed don't stack up financially.

They also look unattractive while the context of economic conditions look so glum, underlined by the increasingly alarmed actions of central banks.

That £50bn of quantitatively eased money, announced last week, is a signal that the Bank of England is ready to take exceptional measures.

But it's also a signal that exceptional measures are all too necessary, so it may not have the intended impact on confidence.

Market opportunities

So that big cloud of uncertainty brings big questions. How much will the new crisis afflicting British banking affect its capacity to do what we need it to do?

Can Britain's huge high street giants retain their dominance over British finance? Or is this the point at which others pounce on the opportunity to buy assets here, or to move into market opportunities?

Ed Miliband's radical shake-up may get political traction. But is he or anyone clear what it could leave in its wake?