Libor scandal shatters fragile trust in banks
By Jonathan Watson
‘There was a period of remorse and apology for banks and I think that period needs to be over,’ Barclays chairman Bob Diamond told a committee of MPs last year.
How wrong he was. The decision by US and UK authorities to fine Barclays a combined total of more than $450 million at the end of June for attempting to manipulate the London interbank offered rate (Libor) – a benchmark interest rate that is used globally to set the price of everything from credit card fees to corporate loans – suggests that banks still have plenty to apologise for. Bob Diamond must know that now: the scandal has cost him his job.
Barclays has been fined more than US$450 million
According to UK business secretary Vince Cable, the affair has revealed ‘deeply corrupt practices’ at the heart of the banking sector. He recently claimed that in considering its regulatory response, the government was facing ‘a moral quagmire of almost biblical proportions’. Imposing financial penalties is not enough, as the public ‘cannot understand how a corporate fine – which will be passed on to customers and shareholders – begins to address the problem,’ he added.
Edwin Coe, the London law firm that brought a High Court case against the government on behalf of 55,000 Railtrack shareholders, is expected to pursue action against Barclays over the Libor mispricing scandal. David Greene, Senior Partner at the firm, says the scandal provides further evidence that self-regulation does not work in the banking sector. ‘The culture of trust in banks that once existed has been exploded,’ he says.
The scandal has also dealt a major blow to the banking sector’s attempts to argue against the imposition of tighter regulation in the wake of the financial crisis. ‘There’s no doubt that the banks are on the back foot in terms of any restrictions on regulation,’ says Greene. ‘The Europeans want to impose greater oversight, and the banks are going to have a hard job arguing against that because of Libor.’
‘The culture of trust in banks that once existed has been exploded'
Senior partner, Edwin Coe
A spokesman for the EU commissioner in charge of financial regulation, Michel Barnier, said this week that the commissioner would propose new rules criminalising the manipulation of benchmarks such as Libor. He plans to do this by amending proposed market abuse legislation – designed to crack down on insider trading and other wrongdoing – to include the direct manipulation of market indexes.
Greene is sceptical about this. ‘The trouble with criminal offences is that you have to go to an extra level,’ he says. ‘For instance, cases have to be proven beyond all reasonable doubt, which isn’t necessarily easy. If you look at the market abuse provisions in the Financial Services and Markets Act and the FSA Handbook, they’re actually quite difficult to prove in terms of criminal proceedings, whereas in the regulatory sphere it’s much easier.’
One might also argue that even a conviction would not be enough of a deterrent. For those in the dock, it might amount to little more than a slap on the wrist. ‘I’m not sure how much of a disincentive that is when there is so much money involved,’ Greene says.
Many have argued that the Libor scandal exposes deep-seated problems at the heart of banking culture. These problems are difficult to solve through regulation alone. ‘You can’t directly change culture through regulation,’ says Roger McCormick, a visiting professor at the London School of Economics (LSE) and a member of the IBA’s Financial Crisis Task Force. ‘But there are things you can do to help foster a better culture and help people inside banks achieve a better understanding of what society now expects of them.’
McCormick believes that we need better objective indicators in the public domain of bank behaviour, particularly the inner workings of banking institutions. One very obvious one is the disciplinary track record of banks. Barclays, for example, has just been fined a record amount, but it is an amount that remains easily affordable for a bank of its size. The damage done to Barclays’ reputation could be far more significant.
‘If we had a league table that showed which banks had been paying the heaviest fines and sums paid in settlement in the last five years, produced annually on a rolling five-year basis,’ McCormick suggests, ‘I don’t think that banks could shrug it off if they were regularly at the top or near the top. It could be a way for society to say to banks: we’re watching you. It would force all banks to ask themselves the difficult questions that people are now saying Barclays has to ask itself.’
Zahira Butt, a colleague of Greene’s at Edwin Coe, suggests that the FSA should conduct some kind of periodic random audit to ensure that the rates the banks put forward for Libor are accurate and reflect the rates of interest that are being charged by other banks when they are lending to fellow banks. ‘The FSA could act as a sort of check,’ she says. ‘Otherwise all you have is the banks’ word for what they think the rate should be, and this scandal shows they can’t be trusted.’