European policy makers warned bankers on Tuesday to expect tougher regulation after a series of scandals demonstrated the industry was incapable of policing itself.
Nearly four years after bank dealings in subprime mortgages caused a global financial crisis, the sector's image is again in tatters due to an interest rate rigging scandal and massive losses from bad trades including at UBS and Societe Generale.
Joerg Asmussen, a member of the European Central Bank's executive board, said efforts within the G20 group of leading economies to address problems in the sector had lost momentum and he urged a new drive to clean up banking.
"The cumulation of misdeeds by individuals at big financial institutions shows that tougher regulations are needed," he told an audience of bankers at a conference in Frankfurt. "Neither internal controls nor external oversight is working."
Mr. Asmussen said that if allegations in the Libor interest rate rigging affair proved true, the consequences for the industry were "unforeseeable."
Barclays was fined a record $450-million U.S. (£283-million) after it admitted manipulating its submissions used to calculate the London interbank offered rate. Regulators believe rigging went far beyond Barclays and are investigating most of the world's largest banks.
In Germany, which holds federal elections next year, all the major parties including Chancellor Angela Merkel's Christian Democrats are preparing proposals to rein in banks.
Finance Minister Wolfgang Schaeuble said on Monday he was looking into expanding the options for taking legal action against bank managers.
He has also backed a European push to impose tighter curbs on bankers' pay. Banks say the 27-nation EU already has the toughest pay limits in the world and new measures would put them at a disadvantage to their U.S. and Asian rivals.
Mr. Schaeuble's predecessor, Peer Steinbrueck, who led Berlin's response to the financial crisis, warned the audience of bankers in Frankfurt that policy makers would act if they didn't.
"Every week you read about some scandal in banking. Be it about Libor, money laundering or mis-trades," said Mr. Steinbrueck, a Social Democrat who could run against Ms. Merkel next year.
"You need to change the culture in banking. If you carry on like this we will have further shocks. If you do not tackle the issue of compensation other people will do it with results that you won't like."
This summer, a U.S. senate panel slammed HSBC for flouting money laundering rules, accusing the U.K. lender of a "pervasively polluted" culture.
That came after Switzerland-based UBS and France's Societe Generale were hit by huge trading scandals. Standard Chartered bank has also been fined $340-million for ignoring U.S. economic sanctions against Iran.
Earlier at the conference, German bankers clashed over plans to give the ECB new supervisory powers, with the co-head of Deutsche Bank saying oversight would work only if it covered a wide range of banks, not just Europe's biggest.
The comments by Juergen Fitschen highlighted a divide in Germany over the scope of the ECB's new powers.
The European Commission, like Mr. Fitschen, wants the ECB to monitor a broad swathe of banks. But the German government and the country's smaller banks are pressing for a limited remit, focused only on those banks considered "systemically relevant,"
The debate over the ECB's role has erupted a week before the Commission unveils proposals for a "banking union" in Europe, a step seen as vital for breaking the link between failing banks and indebted governments.
Mr. Fitschen said it was illusory to believe problems could be avoided by monitoring only big banks like Deutsche, noting that Bankia had become a national problem for Spain and the broader euro zone, though it was not considered systemically important by international regulators.
"No one had Bankia on the list to trigger a crisis," he said.
Bankia, nationalized by the Spanish government in May, is emblematic of the sector's reckless lending during the country's property boom. Spain is now seeking a euro zone bailout of up to €100-billion for its troubled banks.
Georg Fahrenschon, president of the association of German savings banks, rejected Mr. Fitschen's argument, telling the conference that saddling the ECB with hundreds or even thousands of banks to monitor would be onerous and counterproductive.
"Sometimes I get the impression that the whole exercise is designed to unload so much routine work onto the ECB so it no longer has the time or capacity to properly scrutinize the really dangerous institutes," Mr. Fahrenschon said.
Both he and his co-operative bank colleagues expressed concern that a common supervisor was a step on the path to a pan-European deposit guarantee scheme that would end up penalizing strong institutions.
The bank supervision debate was triggered in June when European leaders met in Brussels and agreed to allow the euro zone's new permanent rescue fund to inject aid directly into troubled banks.
Ms. Merkel insisted at the summit that such direct aid be permitted only once a centralized banking supervisor, housed at the ECB, was in place. But it now seems clear that forging consensus, even within Germany, on what this supervisor should look like will be difficult.