Banks, the historical and the ethical One of the world's biggest banks (Barclays) is on the hook for attempting to manipulate interbank borrowing rates. Another (HSBC) is accused of money laundering violations in Mexico alongside sanctions breaches and private-banking tax offences. A third (JPMorgan) lost more than $5bn on a misguided trading strategy. Quite apart from the damage done to the banks" reputations, and the financial fallout for shareholders, one thing is clear: the ethics of banking are broken. The question now must be: how they can be fixed? There has been a lot of talk around the more nebulous concept of "culture." What made a clutch of Barclays staff think there was nothing wrong with rigging Libor rates? Why did HSBC bankers in Mexico not do more to ensure they steered clear of drug money? The recent testimonies of Barclays" former chief executive Bob Diamond and outgoing chairman Marcus Agius before the UK Parliament's Treasury select committee hardly set a good example in terms of frankness. There were at least three instances where the two men's versions of key events leading up to their departure from the bank directly contradicted each other. Indeed, the "tone at the top" was one of the key criticisms of Barclays" made by regulators over the past year or so. Generally, though, the quality and personal integrity of people running these businesses has not been the issue. When the transgressions took place at Barclays and HSBC, even critics admit that the then chief executives - John Varley and Stephen Green, both devout Christians - were men of personal integrity. What, then, went wrong? One key issue must be size. Too big to be trusted is not as snappy as "too big to fail," but it is just as existential a question in the long term. When a bank has hundreds of thousands of staff, it is all but impossible to ensure they all behave all of the time. Runaway acquisitions - especially when they are not integrated properly into the parent group - are often to blame. Most of HSBC's recent problems have their roots in poorly managed M&A. Boards must be stronger, too. They must be ready to challenge strategy and ask awkward questions. They must know the business and the industry - and, where there are gaps in information, they must commission advisers to find it out. And then there is pay. Remuneration structures have long created incentives for dishonesty. In the boom years, investment bankers" pay spiralled upwards, driven by expanding revenue and cut-throat competition between ambitious latecomers to the business. Barclays" rapid growth, most recently after its acquisition of Lehman's US franchise, was a case in point. Regulators" recent push towards smaller cash bonuses, with long-term deferral, is welcome, but the principle should be extended far lower down the banks - that is where much of the malfeasance has happened. Dishonest practices in retail banking - such as the UK's recent payment protection insurance scandal - have a similar root cause. The retail banker's desire to earn commission from the sale of such products should be curtailed in the UK following the Retail Distribution Review, but problems will persist in many countries around the world. Sceptics fear that ways will be found around the rules, anyway. So what are the solutions? To an extent, as the financial crisis drags on, banks are learning from their own mistakes. HSBC, for example, has altered its whole global strategy, with chief executive Stuart Gulliver seeking to join up previously disparate operations and unify the standards it applies anywhere in the world. Regulatory changes should help, too - from Volcker in the US, to Vickers in the UK - limiting profits in investment banking, particularly, and in turn the incentives to misbehave. However, there is merit in being more radical still. Why not force investment banks to return to the old partnership model, in which bankers" rewards are directly related - both positively and negatively - to the risks they run? Opponents say that going back in history like this would undermine any prospect of economic growth in the western world. But the benefits of sustainable stability are surely more important. In the week when two of Britain's big four banks are in the dock over malpractice, there is some heartening balance in the news that the Co-operative Bank - which prides itself on ethical values - is finally set to approve its purchase of more than 600 Lloyds branches, tripling its size in the process. Might the balance of power be shifting towards ethical banking?