Gaining profit, losing trust
There's one commodity that really matters in banking, and it's not money. It's trust.
Your customers need to trust that money you're looking after can be accessed, trust that transactions are processed on schedule, trust that the products you're selling are in their interests and of value, and trust that markets are not being manipulated to benefit the bank's profits and its traders' bonuses.
So, it's quite a week when Britain's banks are found to have run a coach and horses through all of these.
Unfortunately for Royal Bank of Scotland, it's caught up in the week's three big bank nightmares. It's had the mother of all IT malfunctions, holding up around 140m transactions, and finding too late it had inadequate back-up.
NatWest customers have done worse than those with the RBS brand, apparently as a legacy issue from IT infrastructure of yesteryear. But both NatWest and RBS are very close to being sorted. Not so for Ulster Bank. Nine days in, and it's a long way from recovery.
Ireland's central bank is demanding action. And the current aim, with no guarantees, is that it should be sorted by early next week - 13 days after this started. As if Ulster Bank's devastated mortgage and business loan book weren't bad enough for RBS headquarters. You can expect that RBS, very soon, will offer more explanation of what went wrong.
Meanwhile, it faces another grim day of bad publicity for the whole banking sector, with the Financial Services Authority planning to publish its findings on the mis-selling of interest rate swaps to businesses.
These are often complex financial instruments intended to insure clients against sharp increases in interest rates. What they failed to do was to protect against a sharp fall in interest rates, which is what we've had for more than three years.
Small business customers were sold products they couldn't hope to understand, and which have left them expensively exposed to high interest payments.
Banks are fessing up, and the FSA is expected to arrange for an arbitration system, in which customers lodge a claim for mis-selling, and banks accept the intermediary's findings. That, banks hope, will avoid the uncontrolled cost of compensating people for payment protection insurance (PPI), which is running to around £9 billion.
This latest mis-selling is estimated, by the customers' lawyers who are pursuing the banks, to have a bill attached of at least £3bn. Lloyds Banking Group has taken the biggest hit on PPI. But RBS has a very large share of the business market, with 1.2m customers, so even a small proportion of them (I'm told it could be less than 1%) could put it in the front line for losses on this latest mis-selling scandal.
And then there's the rigging of inter-bank borrowing, which on Thursday took 15% off Barclays' share price, and 11% off Royal Bank of Scotland's. And with politicians on the warpath, this has the potential to be more corrosive of public trust in the banks than mis-selling or IT bungling.
That partly depends on people understanding what was going on. And it doesn't help that it's not clear what impact the fixing of interest rates has had. It could be that, at times, it held down interest rates a bit, to the benefit of all those loading up their households and business balance sheets with pre-crunch debt. That, in turn, would make the crunch all the worse.
But at other times, interest rates were being pushed up to suit the positions taken by derivative traders. That could boost borrowing costs throughout the economy. But Barclays - the main culprit in the frame, so far - says the short-term inter-bank borrowing rates were the ones that would have been affected, whereas its customers' interest rates were based on a range of other measures.
Bob Diamond, chief executive of Barclays, wrote on Thursday to Andrew Tyrie, of Westminster's Treasury Select Committee, stressing the difference between two types of influence on the rate at which banks lend to each other - or Libor, the London inter-bank offer rate.
On one hand, traders were pressing their colleagues to over- or under-report (that is, to lie about) Barclays' actual lending rate - this to help them squeeze profits out of tiny differences in Libor.
Diamond points out this may even have acted against the interests of the bank as a whole. An internal review of what went wrong has penalties in its armoury including bonus clawbacks or dismissal.
And obviously, it has now done immense damage to Barclays, given that it led to a £290m fine.
But on the other hand, when the credit crunch came, signalled by Libor soaring, senior bank officials were under-reporting Barclays' borrowing rate, because they felt it over-priced the bank's risk profile. That means they, too, were lying. The motivation, says the chief executive, was to protect the bank, not to manipulate the market more widely, though he does eventually get round to admitting that that was the Wrong Thing To Do.
From what we're hearing, Barclays may not have been the worst offender. Several of the world's major investment banks are still under investigation for being part of this market manipulation, including Royal Bank of Scotland and HSBC. Any deals between regulators and the culprits are more likely later this year than any time soon.
That leaves Barclays facing the pressure for now. And perhaps one reason why Bob Diamond is facing a particularly harsh reaction is his bank's past arrogance. It had avoided the Government bail-out that required lashings of humility and accountability from Lloyds and even more from RBS.
And that meant that when Diamond's colossal bonuses came into the cross-hairs of public opinion, he treated calls for restraint with cheerful contempt. With calls for criminal investigation and for his resignation, he's not doing that now.
He's saying that Barclays will want to work every day to rebuild that precious commodity of trust. "I am determined," he wrote to Mr Tyrie, "that Barclays plays its role as a full corporate citizen, acting properly and fairly always, and contributing positively to society in everything that we do".