Treasury Committee’s Views on Libor

18 08 2012

London Interbank Offered Rate (Libor) is an average interest rate set by the British Bankers’ Association (BBA). Libor, a benchmark interest rate which the international financial system is wholly dependent, is calculated on the basis of submissions of interest rates by major banks in London and – underpinning approximately US $350 trillion in derivatives – serves as the foundation of global banking and finance. Traders claim that Libor has been manipulated since 1991. Of late, the issue has become a huge scandal because banks either understated or exaggerated (“rigged”) Libor to cast false impressions regarding their creditworthiness or to profit from trades.

The problem was that, rather than overstating or understating figures, banks were required to submit the real/actual rates they were paying or would genuinely pay for borrowing from other banks. Ultimately, an attempt to manipulate Libor violates US law as the rate is widely used in American derivative markets. Moreover, adverse consequences in “fixing” Libor exist for consumers and international markets alike. From Britain’s position, in an economically deteriorating environment, the embarrassment could not have been more unfortunate because Libor is a “London” based exchange rate.

In the wake of the scandal Barclay’s was fined £290 million and now HSBC, RBS, JP Morgan and Deutsche Bank have all been “dragged” into the conflict.

In his 2 July 2102 address to Parliament the Chancellor of the Exchequer said that

We’re changing the failed regulation; reforming the banks; now it’s time to deal with the culture that flourished in the age of irresponsibility and hold those who allowed it to do so to account.

When the scandal broke, the Chancellor Mr Osborne also asked Martin Wheatley, the Chief Executive designate of the Financial Conduct Authority to review the reforms required to the current framework for setting and governing Libor. The task included ascertaining (1) whether participation in the setting of Libor should become a regulated activity; (2) the feasibility of using of actual trade data to set the benchmark; and (3) the transparency of the processes surrounding the setting and governance of Libor.

Martin Wheatley’s Review’s initial discussion paper arrived this month and it is available here. It will feature in another post.

Moreover, the Chancellor also favoured a Parliamentary enquiry over a costly public enquiry. Consequently, on 9 August 2012, the House of Commons Treasury Committee ordered that the Second Report Fixing LIBOR: some preliminary findings be printed.

The scandal just keeps swelling and it simply will not go away. In the words of Andrew Tyrie, the Tory MP who chairs the committee, “it doesn’t look good”. He was critical of the Bank of England and the chief City regulator for not being up to speed with the events which unfolded because neither spotted problems with Libor. It was also urged that action by regulators should not be taken after scandals had been broken by the media. More had to be done in advance before disaster, which had to be definitively preempted, struck.

Similarly, members of the committee were extremely unimpressed with the former Barclays boss Bob Diamond. They felt that he had not exhibited the candour and frankness that was expected of an important and experienced witness. His evidence was described as “highly selective” but Diamond staunchly defended his decade and a half career at Barclays. And he has hit back by saying that he was “disappointed” by what the committee said  and that he disagreed with several of its statements. Equally, Diamond also challenged “certain assumptions” about his evidence.

However, in the Committee’s opinion, rigging Libor did terrible damage to the UK’s reputation as a global hub of finance and banking. Tyrie called for a way in the way banks were run and regulated. In fact, criticism of the regulators is quite a significant feature of the committee’s findings:

  • The Committee concurs with the FSA’s assessment of the importance of the damage done to the benchmark rates by the attempted manipulation that the regulators discovered. Attempted manipulation of these reference rates reduces trust and confidence in markets and carries costs for end users. The Committee is concerned that the FSA was two years behind the US regulatory authorities in initiating its formal LIBOR investigations and that this delay has contributed to the perceived weakness of London in regulating financial markets.

Moreover:

  • It is important to state that Barclays’ internal compliance department was told three times about concerns over LIBOR fixing during the period under consideration and it appears that these warnings were not passed to senior management within the bank. Statements that everything possible was done after the information came to light must be considered against a background of serious failures of the compliance function within the bank. In other words, the senior management should have known earlier and acted earlier.
  • Barclays received a reduction in its fine because of its high degree of co-operation with the FSA in its investigation. Barclays also disclosed wrongdoing that it had itself found to the regulators. Any such disclosure is likely to have carried serious risk of reputational damage. Co-operation with inquiries needs to be encouraged by regulators, who need to take into account first mover disadvantage, but it does not excuse or diminish wrongdoing. Nor does the fact that others may have been engaged in similar practices. The FSA and its successors should consider greater flexibility in fine levels, levying much heavier penalties on firms which fail fully to co-operate with them. The FSA needs to give high priority to its investigations into other banks, including those largely owned by the taxpayer:
  • Firms must be encouraged also to report to the regulator instances they find of their own misconduct. While such a firm should still be required to pay compensation to any other party who has been disadvantaged by the misconduct, in cases where a firm makes a complete admission of its own culpability the FSA should retain flexibility in setting the fine payable. The FSA should have regard to the desirability of encouraging other firms to confess their misdemeanours in a similar way. The FSA may also need to re-examine its treatment of whistleblowers, both corporate and individual, in order to provide the appropriate incentives for the reporting of wrongdoing.

The committee’s findings are available below


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3 responses

25 09 2012
Shareholder Democracy and Future Reform « Global Corporate Law

[…] it was not until problems such as the Enron scandal, the sub-prime crisis and more recent Libor scandal – that “corporate governance” became a buzzword in the business sphere, company law and […]

30 09 2012
Wheatley Review on Resetting Libor « Global Corporate Law

[…] to reform the ailing benchmark is on the cards. See earlier posts on Libor on this blog here and here. Moreover, responses to the initial discussion paper are available here, here and here. The […]

3 04 2014
SEC Member Doesn’t Like Shareholder Democracy | Pilant's Business Ethics Blog

[…] it was not until problems such as the Enron scandal, the sub-prime crisis and more recent Libor scandal – that “corporate governance” became a buzzword in the business sphere, company law and […]

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