The LIBOR furore
The Libor scandal is unfolding fast, and with it, some widely-held beliefs about the City and our existing framework for financial markets are unravelling. The likely collusion among traders in London and New York seems astonishing. A new Demos Finance paper seeks to frame the debate in its historical context, and pick out what is new and surprising in what has happened, from what is commonplace in the history of the City of London.
In some respects, elements of what has taken place are not new. There are different offences here. That Barclays wanted to obscure its position of weakness in the financial crisis is at least understandable, even if it was judged to be wrong. On the attempts to manipulate LIBOR and EURIBOR to suit the positions of traders, even that can be argued not to be surprising. For any investment bank with a trading floor, there is a perennial issue of how to control the traders.
The informal way in which LIBOR was set – monitored by a private-sector trade body, the British Bankers’ Association – arguably offered a temptation to traders to try to influence the rate. LIBOR was a scandal waiting to happen.
Yet the scale and scope of this scandal is astounding. This was hardly a one-off action, nor was it kept to one or two people.
A widespread reform agenda will rightly emerge from this. The specifics of how LIBOR, and other market rates, is governed obviously need revisiting. But more generally, this emphasises the need for policymakers, institutional investors and regulators to press on with a reform agenda on investment banks.
At the least, a full implementation of the Vickers Report seems a must. But it isn’t clear that this will be enough to challenge the problems within investment banks. Changing the incentives for senior management is part of changing the culture of banks, and this is a job for shareholders and other stakeholders, not just regulators.
How much will this damage the reputation of City of London as a financial centre? This was not just a Barclays problem, it seems likely that other banks globally were involved. But self-regulatory mechanisms of market-wide standards failed astonishingly in this instance.
The impact on the City depends in part on how policymakers in Whitehall, the Bank of England and Brussels respond. But the challenge is there for the executives of major banks, their shareholders and other bodies in the City: to show how market practice can be reformed in a way which benefits all savers and the wider economy, not just market participants themselves.