Leading Article: Legacy of banking errors

IT IS TEMPTING to dismiss the miserable results announced by Barclays Bank yesterday as just more bad news from another mismanaged big British business. But the truth is more serious than that. It is not only Barclays' shareholders who will be affected by its decision to own up to more than pounds 2.5bn in bad loans. The bank's 6.9 million personal account holders will also be hurt - as will the 750,000 businesses, both big and small, that depend on investment from Barclays to provide the new jobs which will pull Britain out of recession. No one knows how many new businesses that might have started will not now do so because of lack of funds.

Barclays' problems are partly due to the recession and the damage it has done to British manufacturing industry. Even a well-managed bank cannot continue to make money in a recession-hit economy when it occupies the dominant position that Barclays does.

More of the blame lies inside the bank itself, however. In a notable understatement Andrew Buxton, the bank's chairman, admitted yesterday that Barclays' woes were partly the result of 'some poor lending'. That poor lending reached its height in the late Eighties, when Mr Buxton himself was second in command of the bank. In 1988 Barclays demanded pounds 920m in a rights issue from its shocked shareholders without having much specific in mind to do with it. Looking back, it is tempting to conclude that most of that went straight to companies that were buying into the top of the London property boom.

Yet Barclays was not alone. Although its losses were the largest, the bank seems to have been just one among many collectively hypnotised by rising property prices. Twenty years ago the prevailing myth was that sovereign debtors, unlike private borrowers, could never go bust. It took only a string of South American defaults to prove that one wrong; but, less than a decade later, banks seem to have made an exactly similar mistake by believing that money secured on property (or better still, on land) could never be lost.

Prices might rise slower than inflation, the pundits said, but they would never actually fall. It is the belated disproving of this second myth that is causing bankers and customers such pain. The only consolation is that the problems are worse in America and Japan.

Chastened by their experiences of the past two years, many banks have already begun to overhaul their lending practices. They now look more closely at risk, and, in assessing debtors, they rightly concentrate less on asset values and more on cash flow. But that alone is not enough. Institutional shareholders need to ask more searching questions about how well British banks are managed - and, in Mr Buxton's case, they should not be fobbed off by the dividend that he conjured out of reserves after losing more than 21p per share.

Customers, too, need to brace themselves for a further shock. No bank dares to admit it yet, but the 'free banking in credit' that Midland forced on its competitors in 1984 was a mistake: it led banks to raise charges on some accounts to subsidise others. If the banks are to abolish the 20 per cent overdraft and the pounds 25 client letter, they must start to charge holders of high-street accounts the real cost of processing their cheques and statements. That will certainly be unpopular, but it is necessary if Britain is to have healthy banks able to lend to healthy customers.