Bankers Slammed for 'Astonishing' Financial Mess

A culture of easy reward encouraged British bankers to make an "astonishing mess of the financial system" and regulators need to consider whether banks should be broken up, British politicians said on Friday.

"The culture within parts of British banking has increasingly been one of risk-taking leading to the meltdown that we have witnessed," a cross-party committee of politicians said in a damning 121-page report into the collapse of the banking sector.

The Treasury Select Committee made a series of recommendations and said the possible split of retail and investment banking arms remained a "live issue which requires further debate".

The committee blamed a period of low interest rates, the search for yield, a misplaced faith in financial innovation and a failure of the supervisory system for the collapse of top banks.

"Bankers have made an astonishing mess of the financial system," the report said. "However, this was a failure not only within individual banks but also of the supervisory system designed to protect the public from systemic risk."

Britain pumped billions of pounds into Royal Bank of Scotland and Lloyds Banking Group in October and again in January, and more banks would have failed without state help, the report said.

"Given prevailing market conditions it was clear that some UK banks would have collapsed without taxpayer support," it said.

The politicians said it was not clear if a government-backed asset protection scheme unveiled in February would cleanse banks of risky loans or is "a precursor" for setting up a bad bank of toxic assets, and they urged the government to clarify its plan.

The report itself was criticized for being weak, however.

"This very limp set of recommendations does not meet the country's needs," said Vince Cable, spokesman for the opposition Liberal Democrat party.

Sharon Lorimer

"Easy Reward"

Several banks across Europe and the United States have collapsed or needed massive bailouts from taxpayers after losing billions of dollars from losses on risky assets.

British banks have been at the center of the trouble in Europe and five of the country's nine top banks have been bought or are wholly or partially in public ownership.

"Governments, politicians, regulators and central bankers in the UK and across the world share a responsibility for sustaining the illusion that banking growth and profitability would continue for the foreseeable future," the report said.

"A culture of easy reward, illustrated by risky lending of credit and capital, has been underpinned by an assumption of continuous expansion in banking accompanied by an expectation of ever bigger bankers' rewards."

In a related development, part-nationalized Lloyds said its top executives will get no salary increase this year, and could be forced to repay any bonuses they receive.

Sharon Lorimer

The committee urged the government to publish in the next three months a clear and transparent strategy for UK Financial Investments Limited (UKFI), the body managing the government's stakes in RBS and Lloyds, which it dubbed "enigmatic".

And it said it was "entirely inappropriate" that institutions such as building societies, which were recognized as having a safer funding model, should be required to contribute more to an industry insurance scheme than rivals with funding models that have proved more risky.

The government should consider legislation that could make it easier to start up building societies or to remutualize lenders, the report said.

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