SBP News Bulletin

Mr. Yaseen Anwar stresses the need for inculcating risk culture for sound management of operational risks

r. Yaseen Anwar, Governor, State Bank of Pakistan (SBP) has stressed the need for inculcating a risk culture within the organization with open communication channels between business lines and control functions for the sound management of operational risks. While delivering his opening remarks at the Conference on Operational Risk Management at SBP Learning Resource Centre in Karachi on February 7, 2013, he said that SBP is cognizant of its responsibilities regarding sound operational risk management frameworks in banks. SBP will continue to play its role in ensuring effectiveness of the established frameworks in banks. We expect each bank to develop and continuously improve its risk management and control framework depending on nature, location, size, sophistication,

complexity of business operations and approved risk appetite, Mr. Anwar added. Stressing the need for close cooperation between banks and SBP, Mr. Anwar said that the exchange of ideas is very important in capacity building for operational risk management. He expressed the hope that this conference would provide a good opportunity to exchange our thoughts on risk management and learn from each others experiences. SBP Governor, in his address, dwelt at length on three main areas of risks including Operational risk management the issues and challenges; Basel Accord treatment of operational risk and emergence of sound principles on risk management and Regulatory developments & supervisory expectations to strengthen the

SBP News Bulletin operational risk management within the banking sector. Highlighting the importance of risk management, Mr. Anwar said that the SBP will expand its existing reporting mechanism in order to have comprehensive and current information on operational risk of banks. Mr. Anwar said that SBP has adopted a two pronged strategy for effectively addressing the issues of operational risks: i) to update the exist ing instructions on frauds & forgeries and monitoring in banks, ii) issuance of guidelines on operational risk data collection to enhance the scope of loss data gathering in line with the Basel Accord requirements and to provide the industry with minimum set of instructions for consistent recognition of losses and their reporting to a centralized data consortium. These projects are at an advanced stage of consultations with the industry and these guidelines/ instructions will help banks improve their operational risk management processes, he added. SBP Governor observed that it is imperative for our banks to develop requisite capacities to manage their operational risks, collect their loss data, implement risk indicators and set aside capital to cover potential operational risk losses. It is necessary for risk managers to develop awareness of operational risk and effectively use the emerging management techniques, he added. Mr. Anwar further observed that there is a pressing need that banks modify their fragmented approach of operational risk management in favour of a much more comprehensive governance and management framework through clearly defined roles and responsibilities along with reporting procedures. SBP Governor was of the view that those at the top of the organization should take the lead in establishing a strong risk management culture through sound internal governance. He said that the board of directors needs to regularly review the framework and ensure that senior management is actively monitoring the effectiveness of risk management and controls. For this purpose, the board should establish a management structure based on clear lines of responsibility, accountability and reporting. The board should set the banks risk appetite through the approval of operational risk management policy. SBP expects that the board should seek periodic reports from management to monitor the operational risk profile of the bank in a proactive manner, he added. The two-day conference is being attended by commercial bankers, SBP officials, international participants and subject specialists. Staff Report

SBP Governor's press conference on MPS

The Governor, State Bank of Pakistan, Mr. Yaseen Anwar will unveil the Monetary Policy Statement (MPS) for the next two months at a press conference scheduled to be held at SBP Learning Resource Centre Auditorium on February 8 at 4.15 P.M. Earlier, the SBP Central Board of Directors will meet under the Chairmanship of Mr. Yaseen Anwar at SBP Karachi to approve the MPS. Staff Report

SBP News Bulletin

Pakistans economy grows by 3.7%in FY12: SBP Annual Report

akistans economy witnessed a modest improvement in FY12 real GDP grew by 3.7 percent during the year, compared with 3.0 percent in FY11, says the State Banks Annual Report on the State of the Economy for the year 2011-12 released on January 30, 2013. It said the growth was more broadbased compared to FY11, as it was evenly distributed across agriculture, industry and the services sector. The demand side was more insightful, as the growth in FY12 was primarily driven by private consumption, it said, adding that strong worker remittances, a vibrant informal economy and higher fiscal spending, supported consumption growth during the year. SBP Report said that food prices have remained relatively stable during FY12, which helped bring down overall inflation to 11.1 percent better than the 12.0 percent projected earlier. It was this easing that allowed the central bank to

reduce the policy rate by 200 bps during the year; this was done to partially revive private sector borrowing, and encourage banks to improve their intermediation between private savers and borrowers, the Report added. According to the Report, the external front was positive as remittances posted yet another year of strong growth, which not only helped narrow the current account deficit, but also contributed to economic activity. In overall terms, the external sector has been less worrying than anticipated at the beginning of the year; however, as financial inflows dried up, the burden of financing the current account deficit and external debt, has fallen on the countrys FX reserves, the Report added. While services continued to support the economy, commodity producing sectors (agriculture and industry) posted an

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improvement over FY11, the Report said, adding that the growth in agriculture came from livestock and kharif crops, but minor crops witnessed a decline due to the floods in Q1-FY12. It said the positive spillovers from agriculture, coupled with strong remittances and income support schemes, boosted construction activities and household consumption both of which helped the manufacturing sector. In terms of services, there was a sharp improvement in financial sector earnings, driven primarily by the volume of commercial bank financing of the fiscal deficit, and deceleration in fresh nonperforming loans (NPLs), the Report added. Among other factors, SBPs decision to cut its policy rate by a cumulative 200 bps in H1-FY12 was partially motivated by its concern over commercial banks reluctance to extend credit to the private sector. However, in the presence of a risk-free dominant borrower, average bank lending rates fell by only 112 bps, which suggest that banks remain apprehensive about (or uninterested in lending to) the private sector, and were willing to accept lower earnings on government securities, according to the Report. It said the actual outcome in the external sector in FY12 was better: a current account deficit of US$ 4.6 billion, and an overall gap of US$ 3.3 billion, meant that Pakistans FX reserves fell by US$ 4.0 billion, against an initial projection of US$ 4.4 billion. Nevertheless, this contributed to a 9.1 percent depreciation of the Rupee during the course of the year. The Rupee depreciated from November to late

December 2011, and sharply so in the last week of May 2012. The first event may have been triggered by the closure of NATO supply routes to Afghanistan, and sustained by rising oil prices; the second adjustment was a brief market panic in response to international developments. In effect, the Rupee was impacted more by one-off events than the underlying economic fundamentals, the Report added. According to the Report, the Pakistan economy will grow at about the same rate in FY13 as it did last year (FY12). We are confident that milder flooding this year and the underlying factors that allowed for 3.7 percent growth in FY12 will largely remain in play, the Report added. The Report observed that the structural problems in the energy sector, PSEs and the fiscal side, may not be tackled in the near-term. However, since the government paid-off the accumulated subsidies in FY12, we do not expect the same level of fiscal pressure this year. While the government hopes to achieve a fiscal deficit target of 4.7 percent of GDP, we think a range of 6 7 percent is more realistic, the Report added. According to the Report, a key concern for the central bank is the on-going decline in domestic investment. Although the investment environment in Pakistan is likely to remain challenging, we believe the recent 250 bps cut in the benchmark interest rate, could revive private investment and provide some relief to commercial enterprises, In our view, with interest rates at current levels, commercial banks may be incentivized to book high-return private assets, rather than just place money with the

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government. Although SBP does not tell banks what to do, commercial banks should be cautious about how their balance sheets are evolving, and look to diversify their asset portfolio with a longterm view, the Report added. Since the size of the fiscal deficit last year was mainly due to one-off factors, we are hoping things will be better this year, the Report said, adding: We are also optimistic that with the opening of NATO supply routes, Coalition Support Fund (CSF) will be realized in a timely manner. SBP remains hopeful that inflows from privatization (Etisalaat) and the 3G licenses will also be realized in FY13. In making our interest rate decisions, SBP looks closely at the likely impact on the FX market. One must note that the FX markets reaction to the discount rate cuts in August and October 2012 was quite muted, the Report said, adding that in late November 2012, some pressure, however, appeared, even though the current account posted a surplus in the first four months of FY13. In our view, this pressure can be traced to net

outflows to the IFIs (around US$ 1.5 billion during Jul-Nov FY13). Although these payments do not impact the FX market directly, the drawdown of SBPs forex reserves has impacted market sentiments, the Report added. In terms of tradeables, our export projections assume that cotton prices have bottomed-out, while Pakistans low value-added textiles may be insulated from the demand contraction in the OECD, the Report said, adding that we do not expect any spike in imports given the sluggishness in domestic investment, and our view on global commodity prices. We also remain optimistic that inward remittances will continue to post strong growth, the Report said. The State Bank Report stressed upon the urgent need to embark on structural reforms in the energy sector, PSEs and public finances. This, together with a more balanced deficit financing mix in FY13, would ease a great deal of pressure from domestic sources of financing especially the commercial banks, the Report added. Staff Report

SBP News Bulletin

SBP pursuing multipronged strategy to tackle the challenge of financial exclusion in Pakistan: Yaseen Anwar
Mr. Yaseen Anwar, Governor, State Bank of Pakistan has said that the SBP is pursuing a multi-pronged approach to tackle the challenge of high financial exclusion in the country. In particular, SBP is aiming to develop an efficient and sustainable marketbased financial structure meeting the financial needs of the marginalized population of the country including women and young people, he said while addressing the Closure Ceremony of Term Finance (Sarmaya) Certificate (TFC) of Tameer Microfinance Bank on January 24, 2013. He said that the issuance of this TFC will go a long way in diversifying funding for the microfinance sector. I strongly encourage all the financial market players to develop a long term vision for making the financial sector in Pakistan more inclusive, SBP Governor added. Mr. Anwar observed that the estimated microfinance market of 25-30 million clients may not necessarily just need credit services. It is of utmost importance that the industry should aim to provide holistic and appropriate financial services, including deposit, credit, insurance and remittance services, he said, adding that the SBP is well aware of the fact that the industry is beset with a number of challenges in the way of achieving this high objective. SBP is actively engaged with all stakeholders to address the sector specific challenges in a sustainable manner, he said.

He noted that the financial sector in Pakistan remains restricted in its outreach both in terms of its depth and breadth. According to the Access to Finance Study of 2008, hardly 12% of the population has access to formal banking services and another 32% is informally served whereas 56% of the adult population is totally excluded, he said adding that similarly in Pakistan, the estimated size of the microfinance market is in the range of 25-30 million clients which indicates that the current level of microfinance access at 2.4 million clients is only 10% of the potential market. Mr. Anwar said that the SBP with the help of UKs DFID had launched the Microfinance Credit Guarantee Facility (MCGF) in 2008 to match the massive scarcity of funding to the majority of the microfinance market. Prior to the launching of this Facility, and apart from one-off funding deals between the few Microfinance (MF) providers and commercial banks, the commercial funding market was nonexistent for microfinance providers and the microfinance industry was severely handicapped and highly donor dependent for its funding needs, he added.

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SBP Governor said the scope of the Facility has recently been enhanced to allow microfinance providers to mobilize nonbank financing from capital markets, further diversifying sources of financing for micro borrowers, he said, adding that it is heartening to see that a number of microfinance providers, including Tameer Microfinance Bank, while benefitting from the MCGF, has helped the facility to attain this objective. He briefly shared with the audience that the MCGF of UK 15 million has been instrumental in relaxing funding constraints of the microfinance sector in Pakistan which are as under: So far, 25 guarantees have been issued under MCGF, mobilizing over Rs. 7 billion for 5 leading MF providers, enabling microcredit access to around 350,000 new micro borrowers. The Facility, due to its risk sharing structure has achieved a leverage of 3 times, mobilizing an additional Rs. 5 billion from private capital markets, establishing that

microfinance may not be that risky as a business proposition, and Most of all, the Facility has engaged 16 commercial banks and recently retail investors in funding the microfinance providers. Mr. Anwar said the MCGF has helped build links between micro borrowers and banks/DFIs. The familiarization of the banks/DFIs with the client will eventually lead to mainstreaming and graduation of the micro borrower. The SBP Governor said the Facility has introduced microfinance business to banks/DFIs as banks have to evaluate the microfinance providers which must have helped them develop their own sense of the risks involved in microfinance. As a result, banks are now more willing to invest in micro banking. Mr. Anwar said the Facility has helped microfinance providers to offer small ticket sizes for retail investors. This has offered small retail investors an alternate channel for investing their savings and earning relatively higher returns, encouraging the concept of micro-savings, he added. - Staff Report

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SBP Deputy Governor calls for building inclusive and stable financial sector in Pakistan

he Deputy Governor, State Bank of Pakistan, Kazi Abdul Muktadir has advised the consumer associations, trade bodies, Banking Ombudsman, financial & legal functionaries, banks and Competition Commission to join hands in eradicating financial consumer malpractices for building an inclusive and stable financial sector in Pakistan. Delivering his key note address on Financial Inclusion, Consumer Awareness and Protection at the 4th Conference on Financial Services and Consumers at a local hotel in Karachi on January 31, 2013, he regrettably pointed out that financial sector in Pakistan remains restricted in its outreach as the majority of population remains either excluded or informally served. This limited access is reflected in the total number of bank accounts, presently around 32 million, and the total number of borrowers, which is only 5.7 million, he added. This high level of financial exclusion is largely attributed to two major factors, i) lack of appropriate product offering by financial service providers and ii) lack of public awareness about availability of financial services and products, he said. Mr. Abdul Muktadir said that SBP is cognizant of high financial exclusion in the country and committed to tackling the associated challenges in a sustainable manner. He outlined the multi-pronged financial inclusion strategy of SBP as under:

Introduction of Basic Banking Account (BBA), requiring commercial banks operating in Pakistan to provide basic banking facilities to the low income people of the country. A BBA can be opened with a minimum deposit of Rs1, 000 carrying no fee, no limit of minimum balance and offering full ATM facility. Introduction of the Annual Branch Licensing Policy which requires commercial banks with 100 branches or more to open at least 20% of their branches outside big cities and set up branches in Tehsil Headquarters where no branch of any bank exists. A world class regulatory framework to enable commercial microfinance and branchless banking in Pakistan. A national microfinance strategy SBP with the assistance of UK Department for International Development (DFID) and other donors launched programs to increase access to finance in the country, he said, adding that the DFID-funded Financial Inclusion Program (FIP) aims to address financial exclusion through a variety of interventions. Mr. Abdul Muktadir pointed out that FIP interventions largely focus on addressing market failures and industry bottlenecks,

SBP News Bulletin while addressing issues of fair treatment of clients and consumer protection. FIP is supporting the establishment of a separate national level Credit Information Bureau for microfinance clients, he said, adding that FIP is also supporting Pakistan Microfinance Network (PMN) to introduce the Transparent Pricing Initiative in Pakistan. This initiative will make the prices for the microfinance market available for the first time in history, SBP Deputy Governor added. SBP Deputy Governor said that FIP is also supporting strengthening consumer protection under the industry-led SMART campaign that is seeking to improve client protection mechanism in the microfinance sector. The first-ever Nationwide Financial Literacy Program (NFLP) launched in January 2012 intends to create awareness about basic financial concepts such as budgeting, savings, investments, debt management, financial products, branchless banking and rights and obligations of consumers etc., he said, adding that the pilot phase of the program has been concluded successfully by targeting about 50,000 beneficiaries in various provinces, regions and districts with emphasis on low income strata and its effectiveness is currently being evaluated. Following a third party independent assessment, the program will be scaled up to the national level in its next phase, SBP Deputy Governor added. Mr. Abdul Muktadir said that due to lack of a Financial Consumer Protection legal framework at the National level, SBP has been promoting financial consumer protection in the industry through regulatory initiatives on the basis of its powers under the BCO, 1962. These include: issuance of Prudential Regulations for Consumer Financing; fixation of minimum rate of return on deposits; issuance of guidelines for internal controls for cheque payments; issuance of guidelines on sale of third party products; issuance of operational guidelines for credit card business in Pakistan; issuance of operational guidelines on ATMs; issuance of guidelines on collection of utility bills and issuance of guidelines on priority to senior citizen and pension disbursement through Banks. I believe that financial consumer protection could be best achieved if the financial service providers develop and adopt more responsible business practices, encompassing their entire product value chain, SBP Deputy Governor said. Staff Report

State Bank reduces refinance rate

The State Bank of Pakistan (SBP) has decided to cut the rate of refinance under the Export Finance Scheme (EFS) by 0.1 percentage point from February 01, 2013. This is the second rate cut announced by SBP in a month. Earlier, it had reduced the refinance rate by 0.2 percentage point. It has been decided that rate of refinance under the Export Finance Scheme applicable from February 01, 2013 and onward will be 8.20% p.a. till further instructions. The commercial banks shall ensure that where financing facilities are extended by them to the exporters for availing refinance facilities under the Export Finance Scheme, their maximum margin/spread does not exceed 1% p.a., according to a Circular issued by SBP on January 31, 2013. The revised reduced markup rate would also be applicable on outstanding loans granted under EFS. Accordingly, banks have been advised by SBP to immediately re-price their outstanding loans granted under EFS, keeping in view the revised reduced markup rate. Simultaneously SBP BSC offices would also apply reduced markup on outstanding

SBP News Bulletin refinance loans granted under EFS. In order to reconcile the position of re-priced loans, banks should submit particulars of outstanding loans re-priced by the bank under EFS on the prescribed format to the concerned SBP BSC office(s) within 10 days from January 31, 2013. .The reimbursement of mark-up rate benefit to exporters, on excess performance under Part-II of the Scheme, as specified in SMEFD Circular No.15 dated October 31, 2009, will be adjusted accordingly while keeping in view the revised mark-up rates, the SBP Circular added. Staff Report

SBP issues licence to U Microfinance Bank to operate at national level

The State Bank of Pakistan (SBP) has issued a nationwide microfinance banking licence to U Microfinance Bank Limited (formerly Rozgar Microfinance Bank Limited) to operate at national level. It may be pointed out that Rozgar Microfinance Bank Limited was a district wide microfinance bank (MFB) operating in Karachi district with one branch and 6 service centres. In August, 2012, Pakistan Telecommunication Company Limited (PTCL) was allowed by SBP to acquire 100% shareholding of Rozgar Microfinance Bank Limited with the condition that PTCL would a nationwide MFB within one year by bringing in a professional management team. After completion of all relevant formalities and change in name of Rozgar MFB to U Microfinance Bank Limited, SBP issued a

nationwide Microfinance Banking Licence to U Microfinance Bank Limited. Staff Report

SBP issues licence to exchange companies

The State Bank of Pakistan (SBP) has issued licence to M/s Sadiq Exchange Company (Pvt) Ltd, Gujrat and M/s ZeeQue Exchange Company (Pvt) Ltd, Lahore to operate as fullfledged exchange companies. SBP has cancelled the licence of a nonoperational exchange company, M/s SIBL Exchange Company (Pvt.) Limited, Karachi as the central bank declined to renew the authorization/licence issued to M/s SIBL Exchange Company to operate as an exchange company some time ago. SBP has also advised the company to ensure that no business is carried out in the name of the company in future. - Staff Report

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SBP-Panthers win 4th state bank inter-department cricket tournament

SBP-Panthers won the 4th State Bank Inter Department Tape Ball Cricket Tournament 2012-13 by beating SBPDolphins by 15 runs in the final played at SBP Sports Complex, North Nazimabad, Karachi. Batting first, SBP-Panthers scored 106 for 7 in 10 overs. In reply, SBP-Dolphins could score 91 for 8. Suleman of SBPPanthers showed all round performance by scoring 32 runs and taking 3 wickets. Earlier, SBP-Dolphins beat SBP-BSCStallions by 7 wickets in the semi-final of the Tournament. Batting first, SBP-BSC-Stallions scored 93 for 6 in allotted 10 overs. In reply, SBPDolphins scored 94 for 3. In the 3rd Festival Match played at SBP Sports Complex, North Nazimabad, Karachi, Karachi Bankers Club XI beat State Bank Governors XI by 2 wickets. Batting first, State Bank Governors XI scored 69 for 8 in 10 overs. In reply, Karachi Bankers Club XI scored 74 for 8 wickets. The Deputy Governor, State Bank of Pakistan, Kazi Abdul Muktadir, who was the Chief Guest on the occasion, distributed prizes. SBP-Panthers emerged as the Champion of the Tournament and won the cash prize of Rs.50,000/- where as SBP-Dolphins stood runners-up and won the cash prize of Rs.25,000/-. The 3rd position was clinched by SBP-BSC-Stallions who received the cash prize of Rs.10,000/-.

Speaking on the occasion, Mr. Abdul Muktadir appreciated the efforts of SBP Sports Committee for organizing such events for the employees of the Bank and their families. He said that the employees of the Bank should visit SBP Sports Complex at North Nazimabad to use the sports facilities provided by the Bank. At the end, Mr. Cornell J. B. Fernandes, Secretary, Karachi Bankers Club thanked the Chief Guest and all guests for attending the occasion. He also lauded SBP Sports Committee for organizing the Tournament. Staff Report

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Foreign News

Cyber -security War on terabytes

As banking has gone electronic, it has also become vulnerable

IN THE dusty hills north of Madrid, in low-slung buildings guarded closely like bank vaults of old, are the rows of servers that run the far-flung banking empire of Santander, a big international bank. Ever since the 2001 attacks on the World Trade Centre, banks like Santander have invested billions in safeguarding and duplicating their data centres to protect them from terrorist attacks and natural disasters. The threat against banks has, however, evolved. Although the physical infrastructure of the worlds financial system is largely secure, the software that runs on it is not. Bank bosses and regulators are becoming more concerned by the threat posed to financial stability by networks of hackers that have launched a series of attacks on banks over the past few months. In that time some 30 large global banks, mostly American, have suffered from a series of assaults designed to shut down their websites. These attacks are known as distributed denial of service (DDoS) attacks because hackers harness an army of infected computers to bombard the target with internet traffic with the intention of overloading it. They are relatively unsophisticated. But they have periodically frustrated customers trying to use online services at banks including JPMorgan Chase, Wells Fargo, Citigroup and PNC. They have also shown some novel features, such as the conscription of computers in cloud computing data centres, increasing the amount of spurious traffic generated. Several people familiar with these attacks say there are strong indications that the hackers are statebacked; many suspect the involvement of Iran. The attacks have caused little more than brief inconvenience, mainly because they were targeted at the public face of the affected banks rather than their connections to other banks and to payment systems. Even so, they have brought to light vulnerabilities in banking and payment systems. Ross Anderson, a professor of security engineering at the University of Cambridge, frets that hackers could cause mayhem if they were to aim DDoS attack at banks crucial infrastructure instead of their websites. If 20,000 machines started hammering British payment gateways on the last weekend before Christmas, people wouldnt be able to shop except with cash, says Mr Anderson. Another risk is that hackers may graduate from crude DDoS attacks to more sophisticated ones that secretly penetrate banks systems and then steal or delete data. From what weve seen the threats havent been life-threatening, says one regulator. At the same time we want to be ahead of this

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curve. The fundamental challenge is that the risk morphs quickly and can be difficult to detect. The official responses include increasing regulators oversight of banks computer systems and war-gaming attacks on banks and the networks that connect them. Yet much remains to be done. At the moment banks have little incentive to share information on attacks and vulnerabilities with regulators or competitors. Supervisors also appear to be unwilling to talk publicly about their concerns or about investigations into lapses by banks, such as the systems failure in mid-2012 at the Royal Bank of Scotland that left many customers unable to carry out transactions. One step is for regulators explicitly to acknowledge that an IT failure at one bank can spread financial instability or undermine trust in payment methods such as debit cards. They could then grade banks publicly on the quality of their systems and force them to improve things if they fall short of required standards. But that approach raises another, thornier question: whether governments should just force banks to invest more of their own money in cyber-security, or whether they should devote their own resources to protecting banks from attacks by enemy states and their surrogates? No one in the United States is expected to provide for their own air defence, points out Richard Bejtlich of Mandiant, a computer-security firm. We have an army to repel a land invasion, so who is out there protecting the cyber lanes of control? Nobody. It is a free for all. - The Economist

The cost of making bankers behave The problem with values statements is how to make them stick, writes Philip Augar
The rules have changed. You wont feel comfortable at Barclays and, to be frank, we wont feel comfortable with you as colleagues. The message in this months letter to staff from Antony Jenkins, the banks new chief executive, was plain: if you dont like our values, get out. It is a strong start to reforming the banks culture but, as Barclays recent history shows, the problem with values statements is making them stick. For, even as some employees were fiddling the London interbank offered rate and selling customers interest rate swaps and unnecessary payment protection insurance, the bank already had an apparently robust code of conduct. Our organisation, read one crucial section, was founded on traditional values of trust and honour and our success has been, and continues to be, dependent not only on the quality of our products and services, but on the way in which they are delivered. We expect every Barclays employee, and others who work on our behalf, to conduct themselves according to consistently high professional and ethical standards. That statement was signed by John Varley, chief executive until 2010, and reinforced by his successor. Bob Diamond said in a radio lecture in late 2011: Culture is difficult to define. I think its even more difficult to mandate. But, for me, the evidence of culture is how people behave when no one is watching. We did not have to wait long to know how some Barclays people were behaving. The banks involvement in the scandals that came to light the following year showed, as Mr Jenkins noted coyly, that: We were not immune at Barclays from these mistakes. Email evidence suggests senior management

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may have known about the lowballing of the Libor rate as far back as 2007. Today, the top of the bank is wearing belt and braces. Sir David Walker, a City of London governance expert, has been appointed chairman, supported by Sir Hector Sants, former Financial Services Authority chief executive, who will oversee regulatory relationships. They will shortly receive a board-commissioned report from leading City lawyer Anthony Salz on the banks culture and ethics. It is essential that they follow through. By the people they appoint, the actions they reward and those they punish, senior executives set the tone. Signals will be read and conduct accordingly amended. There are three steps that would reinforce the message. First, training in all aspects of Barclays code should be compulsory for employees, no matter where they are based or in which line. Adherence should be hardwired into employees terms and conditions and annual appraisals. Second, senior managers should be required to make an annual personal, signed statement describing how this code has been implemented in their area of responsibility. For board-level post holders, this should be audited and separately verified by nonexecutive directors. Third, pay practices must change. In investment banking, recent moves from short-term bonuses towards longer-term incentives and clawback provisions are the way forward. But bankers dealing with private individuals, small and medium-sized enterprises, and other less financially sophisticated customers should have further constraints. In retail banking, senior executives rewards should be linked to customer measures such as overall satisfaction, complaint levels, and their fair resolution and regulatory compliance. Remuneration for frontline staff should never be linked to sales. But the problem does not start and end with Barclays. The bank was the first to settle its Libor case with regulators in the US and UK. It would help if further measures it took ideally both radical and prompt were introduced in conjunction with an industrywide code of good financial practice overseen and enforced by an independent body. It is a subject on which the UKs Parliamentary Commission on Banking Standards is likely to speak when it reports next month. The UK financial services industry, meanwhile, this week will launch a voluntary scheme to raise the quality of boardroom leadership. This is an important moment, offering the potential for banking to begin to restore the status it lost after the big bang of the 1980s. The writer is a former group managing director at Schroders, and author of Reckless: the rise and fall of the City - Financial Times