Wheatley, Libor and the End of Self-regulation for the City of London

Is This the End of Self-regulation for the City of London?

Who trusts the banks? The announcement on 28 Sept 2012 would seem to indicate that no-one trusts the banks.

The formal announcement that the British Bankers’ Association (BBA) will no longer oversee the setting of Libor indicates to me that the regulators and government no longer trust our banks, so why should we?

• According to Martin Wheatley, “the BBA acts as the lobby organisation for the same submitting banks that they nominally oversee, creating a conflict of interest that precludes strong and credible governance”.

In other words, in the City of London, self-regulation cannot be trusted to work.

I don’t think many of us will find this to be a great surprise after the revelations of Barclays trying to rig Libor rates just to line their own pockets, and that’s probably just the tip of the ice burg. What will Libor find when it investigates other banks, such as the Royal Bank of Scotland?

• In June 2012 Barclays paid fines totalling £290m after admitting it had attempted to manipulate Libor following an investigation by US and British regulators.

British Bankers’ Association (BBA) Replacement

It now looks like the BBA, which created and administered Libor since 1986, will be replaced by a data provider such as Bloomberg or Reuters or a regulated exchange. This new administrator of Libor will be selected by a committee to be chaired by the former 3i chair Baroness Hogg and which will be set up by the Treasury and the Financial Services Authority.

What is Libor?

The London Interbank Offered Rate is the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks. It is usually abbreviated to Libor or LIBOR, or more officially to BBA Libor (for British Bankers’ Association Libor) or the trademark bbalibor. It is the primary benchmark, along with the Euribor, for short term interest rates around the world.

Libor rates are calculated for ten different currencies and 15 borrowing periods ranging from overnight to one year and are published daily at 11:30 am (London time) by Thomson Reuters. Many financial institutions, mortgage lenders and credit card agencies set their own rates relative to it. At least $350 trillion in derivatives and other financial products are tied to the Libor.

In June 2012, multiple criminal settlements by Barclays Bank revealed significant fraud and collusion by member banks connected to the rate submissions, leading to the Libor scandal. [Source: http://en.wikipedia.org/wiki/Libor]

Who’s Really at Fault in All This Mess

Given that the BBA asked the Financial Services Authority and the Bank of England for help in 2008, when problems in the market first became conspicuous, why were the problems not addressed? So who’s really at fault in all this mess, the banks, the BBA, the regulators? In my humble opinion, all of them. They all put their own interests ahead of the nation and it’s peoples.

Why Does Libor Matter?

Why does this issue with Libor and the rates they set matter? Well the Libor rates indicate the cost of borrowing for banks which in turn dictate the pricing of global financial transactions worth more than $350 trillion. For you and me that equates to the interest we get from investments and the mortgage rates we pay.

More Important Wheatley Reforms

Wheatley has other important reforms, apart from kicking out the BBA.

1) Forex trading simplified. The less heavily traded currencies, the Aussie dollar, the NZ dollar, the Canadian dollar, Swedish krona and Danish krona, will be axed.

2) Currency interest rates bankers submit to the panels for calculating the benchmarks will be based on actual transactions, rather than the current practice of guesswork.

3) The whole Libor-setting process will be firmly brought inside the regulatory net, so that the procedures followed by banks in submitting rates for the Libor calculations will be vetted by regulators and attempting to rig the rate will become an unambiguously illegal action.

To Bank or Not to Bank, That is the Question!

Unfortunately we are stuck (for the moment) with the bankers and other financial institutions, without them life would simply be chaotic. But, you have to ask yourself, who is, and who really should be running our economies? Why was such a globally important part of our infrastructure allowed to progress without (it would seem) no real oversight by regulators.

I’ve heard cries to, “asset strip banks immediately”, “prosecute them all for fraud” and “remove all bonuses from the banking system”. But would this really help? We’re dealing with some of the smartest people on the planet, if they intend to “fiddle” the system, they’ll find a way. Maybe it’s time we took such decisions out of greedy human hands and created an autonomous computer system to look after both our national and global financial interests?

Wheatley, Libor and the End of Self-regulation for the City of London Conclusion

Did we really place such great faith and trust in our banks and financial markets? Let hope we’ve learned our lesson (but I somehow doubt it)! Well, I hope you found something useful and enjoyed this article, Wheatley, Libor and the End of Self-regulation for the City of London. Don’t forget to let me have your thoughts in the comment box below. See you soon.