Banks In The Dock - Again
The recent exposure of Barclays (and perhaps other banks as well) for mis-reporting borrowing/lending rates to the British Bankers Association (BBA) for London Inter Bank Offered Rate (LIBOR) fixings has brought more unwelcome attention to the banking industry. The fact that only a tiny minority (as usual) are guilty of this behaviour is irrelevant; “those unethical bankers” are screwing the public yet again.
One of those under investigation is claiming that comments from senior figures in the government and one particular Bank of England (BoE) official resulted in his bank doing what it did. The investigation will no doubt be lengthy
and cost taxpayers a fortune. The BoE
official has denied giving any guidance; the words that he allegedly used could
be interpreted as comments rather than guidance.
LIBOR is calculated by a panel of selected banks submitting
their “estimates” of what it would cost them to borrow over certain periods of
time and submitting these to the BBA.
The four highest and lowest rates are then eliminated and the remainder
are averaged to produce a “fixing” for the period concerned.
In terms of the Sterling Pound LIBOR panel, nine of the 16
panel banks are foreign-owned. Of the 18
banks that make up the US Dollar panel, only 4 are UK-owned. Any investigations may have effects on the
USA, Japan, France, Germany, Switzerland, The Netherlands and Canada. However, it all seems to have happened in and
to have been driven from London…
The effects of reporting low borrowing rates include:
Con:
·
People think that your bank is stronger because
it pays less interest on borrowings (it is seen as lower risk). This misrepresents the situation to other banks that may lend to that bank
and to investors.
·
Interest Rate Swaps are based on LIBOR. Depending on the deal, the bank may not have
to pay out under these contracts, thereby inflating its own profits whilst its
counterparty “loses out”.
·
Should rates be corrected upwards, loans become
scarcer and more expensive. Worthy
projects may be abandoned and scaled back, hurting the economy in
different ways.
·
People will earn lower rates of interest on cash set aside.
·
Investors may switch to equities if interest
rates on cash are too low, thus inflating equity prices for the wrong reasons.
·
Potentially expensive litigation may arise
against banks from “injured parties”.
·
The reputation of the City of London as a major
world financial centre is tarnished, possibly leading to reduced business and
job losses.
Pro:
·
Large loans to clients may carry lower interest
rates than they should as interest rates on such loans are usually expressed as
LIBOR plus a “spread”. The effect is
that businesses find it cheaper to invest in new projects to create wealth.
·
In times of economic crisis, lower borrowing
costs help to stimulate the economy – an advantage for the government of the
day.
On the face of it, it would appear that if the result of
“manipulation” is that borrowing costs fall (especially during an economic
crisis), then there are more advantages than disadvantages.
The main disadvantage, however, is lack of trust in the financial institutions that are meant to be
renowned for their probity. This in turn
leads to damaging (and expensive) investigations, financial penalties, litigation,
possible jail sentences, ruined careers and reputations, an increased
regulatory burden that may stifle beneficial financial innovation for the
benefit of consumers and people taking their money out of shares in the financial institutions in a
country. Add to this, in London’s case,
a possible shift of business to other financial centres.
Conclusion? This needs
to be investigated, and a judgement call made on who said what to whom and what
it may have meant. Suffice it to say, a
number of highly placed people will not come out of this well and London’s
reputation will suffer.
Labels: Crisis Management, Customer Care, Regulation, Risk
posted by William Martin @ 18:47
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