The Libor Scandal - Essay Example

The Libor Scandal A research that was carried out in on manipulation of the interbank lending rates. The investigation showed that the plot that multiple banks were taking such as UBS, Barclays, Rabobank, and Royal bank was widespread. Regulators in the UK, United States, and Europe were fining banks that were rigging interest rate an amount of up to 6 billion dollars (Weldon 2013). Libor is an interest rate that is benchmarked on the basis at which banks lend unsecured funds in the London market. Libor is published by BBA (British Bankers’ Association). Every morning the banks are required to present their costs of borrowing to the data collection Thomson Reuters Service. The agent then gets rid of the lowest and highest 25 percent of those submissions and the rest are averaged to determine how much the Libor will be. Libor can be said to be very critical as a global benchmark for the short-term interest rates as it is calculated for different maturities and different currencies (Hall 2013). Libor has an effect on global borrowing since here are so many banks worldwide that use it as a base rate to set interest rates towards their customers and the corporate loans. There are hundreds of dollars in trillions in form of loans and securities that have a link to labor. The securities and loans are inclusive of home loans and auto loans. If labor rises then the rates and payments made on loans also increase and when labor falls, they fall. In addition, labor is used for a range of retail products like mortgages and loans given in collages. Labor is also used as the means of settling interest rates contracts in the major world exchanges (Varriale 2012). There is a potentiality that traders manipulated Libor. Financial institutions including Barclays have been under investigations for being suspected of manipulating labor rate. The financial institutions being suspected are inclusive of those in the UK, United States, Japan, and Canada. The first time that Barclays was suspected for manipulating Libor was in 2005. The aim of manipulation of labor was to ensure that the traders of the bank make high profits that are boosted by the base rate, which is the labor rate. During that time, the traders were able to ask the Barclays employees to give figures that in turn would benefit traders and not the rates that bank would pay in order to borrow money. However, there were traders who were able to coordinate with other banks to change the rate too. In this period, Libor maneuvered downward and upward based on the position of the traders (Touryalai 2012). Altering labor rate highly distorts the trust that exists in marketplace and it becomes difficult to trust the rates being used in lending between banks. With an onset of a global crisis, the Barclays bank was able to manipulate labor downward through telling the Libor calculators to borrow money at rates that are not expensive so that the bank appears less risky. Barclays submitted artificial low rate and this rate gave it some form of stability when the globe was unstable (Fields 2014). The main scandal experienced with Libor is that of major banks manipulating Libor to their own benefit. Most of the banks involved are big banks. When big banks collude and submit rates that are fraudulent then it becomes a concern. Small changes in the Libor rate could mean millions of dollars profits or losses. Therefore, for 0.1 percent of manipulated Libor traders can earn up to a million dollars. The market is like a zero-sum game where there is a looser for every winner. Therefore, the fraudulent profits that traders and banks were making were at the expense of other parties. Such parties include the municipal governments who saw a loss of up to ten billion dollars and the U.S homeowners who have to pay high mortgage rates because of the manipulations. Despite the financial losses that were experienced, the manipulation also harmed the global financial system since it lost its integrity thus experiencing a blow on confidence yet they financial crisis were being experienced (Bair 2012). It is not evident that the banks involved in the Libor scandal had been given a notice against their attempts in 2012. The attempts made in manipulating Libor up and down and in understating the Libor submissions in the financial crisis were the main causes of the scandal (Nichols 2012). The banks made claims that the integrity of Libor was questionable. The cases against Barclays and Deustche bank pleaded for amendments on claims against them by questioning the integrity of Libor. In 2013, claims against the Barclays bank were amended yet those against the Desutshe bank were not amended. The case against Barclays was heard in 2014 and the bank did the best to make Libor look non-substantial (Goldwasser 2012). The question on who failed for the Libor scandal to take place is often asked. In today’s world, there is a high dominance of the financial regulation. The global financial crisis triggered an erosion of the public and private wealth. Due to the toxic environment emerged the Libor scandal (Kraten, 2013). The Libor scandal for the regulatory policies had some implications since Barclays must base submissions on the market prices instead of some estimates on borrowed costs. After investigations were carried out the institutions that were involved all got fined up to six billion dollars and criminal charges have been made on individuals. In addition to the regulatory fines, the institutions found guilty may end up parting up to thirty five billion dollars in the legal settlements. The financial regulators fined the Barclays bank a fine of 290 million dollars, the UBS got a fine of 940 million dollars, and the RBS got a fine of 390 million dollars. Investigations on other banks are still ongoing and action will be taken as soon as they are found guilty (Bodamer 2012). The regulatory fines could behave criminal liability added to them. The Barclays settlement is a joint trans-Atlantic investigation. Several staff were retrenched as a result of the Libor scandal since there were individual wrongdoings that contributed to the whole scandal. The method that Libor is set to could have highly contributed to the collusion that took place but the failure of some regulators made it worse. After the scandal, the federal reserve of New York has been defensive by indicating that even though it was aware of the flaws taking place in Libor setting it did not have jurisdiction to make any changes other than just write recommendations. The Bank of England that received the recommendations claimed that they lacked substance to even start an investigation. The US regulators faced serious competence questions. In the UK, the Libor Scandal made a great impact on the regulatory authority (Kohn 2014). The FSA has been accused by the selected committee of the treasury of being blind to the initial failure of compliance by Barclays. The committee said there was a failed relationship between the bank of England and the FSA. The calculation of the bank, the FSA and the bank of England was payment of dividends. There was no blame on any individual executive or any expectations of resignations. The disjuncture that was seen to exist between the stated values and the lived values was the link to the failure of the entire internal compliance (Scheinberg 2013). The Libor crisis and the impacts it had show that there are more and better approaches that can be used in risk management to link private rights and the public duties. Defective disclosure may not have been the cause of the crisis but a better way of articulating the risk was also unlikely. Libor is supposed to be an honest number since the assumption is that all the banks are able to play by the rules so that truthful estimates are given. The market is assumed small and banks are expected to know the operations of other banks. No one really knows what is going on in the market since the banks estimates are given instead of actual prices (Ray 2014). The problem arises because those who are involved in setting rates have the incentives to lie. These incentives could have contributed to the Libor scandal since individuals will want to make profits for their banks. There were no transparency mechanisms set in setting of the Libor rates. The banks are weak and they may not have wanted to submit honest estimates of high prices that they have to pay in order for them to borrow (Schaefer 2012). For example, in the case of Barclays there were two different types of rate fiddling. The first was one involving some derivative groups of traders in the Barclays bank and other banks who tried to influence the Libor rates for them to make profits. The Barclays bank led the derivatives and even small moves on the Libor resulted to profits or losses. However, the bank has tried to explain and present the incidents as actions carried out by a few traders. Various employees of various Barclay’s banks colluded with each other and it shows that the administrators tolerated it. The requests were written in requests that were illegal and questionable. There is the necessity of change to take place to avoid the Libor scandal from taking place again. The rate should be based on the actual lending data as much as possible (Fernandez 2012). Statistics of companies that were fined in relation to adjusting Libor. company Year fined Amount fined(dollars) Barclays bank 27th June 2012 59.5 million UBS AG 19th December 160 million The Royal Bank 6th February 87.5 million Europe limited September 2013 14 million Rabo Bank 29th October 2013 105 million Martin Brokers (UK) Limited 15th may 2014 630,000 Bibliography Bair, S 2012, The Fed Dropped the Ball during the Libor Scandal. Could It Happen Again?, Fortune, 166, 4, p. 46. Bodamer, D 2012, What the LIBOR Scandal Means for Real Estate, National Real Estate Investor, 54, 6, pp. 14-18. Fernandez, T 2012, LIBOR Pains: Whats the Impact?, Money Management Executive, 20, 32, pp. 1-6. Fields, G 2014, Common cause: institutional corruptions role in the Libor and the 4pm fix scandals, Law & Financial Markets Review, 8, 1, pp. 8-12. Goldwasser, J 2012, Libor: No Worries, Kiplingers Personal Finance, 66, 10, p. 15. Hall, C 2013, Anything for You Big Boy: A Comparative Analysis of Banking Regulation in the United States and the United Kingdom in Light of the LIBOR Scandal, Northwestern Journal Of International Law & Business, 34, 1, pp. 153-180. Kohn, A 2014, Libor: The Clearinghouse And Exchange Based Solution, Fordham Journal Of Corporate & Financial Law, 19, 2, pp. 455-491. Kraten, M 2013, Why Libor Manipulation Matters, CPA Journal, 83, 9, pp. 6-10. Nichols, J 2012, Romney: What Libor Scandal?, Nation, vol. 295, no. 7/8, p. 5. Ray, D 2014, Lloyds suspends 7 employees in wake of Libor rigging scandal, Money Marketing (Online Edition), p. 6. Schaefer, S 2012, Know Your Financial Scandals: Libor, Peregrine And The London Whale, Forbes.Com, p. 28. Scheinberg, R 2013, Libor: A Finance Lawyers Assessment, Banking Law Journal, vol. 130, no. 2, pp. 122-128. Touryalai, H 2012, Barclays Libor Scandal Heats Up As Paul Tucker Tells His Side Of The Story, Forbes.Com, p. 1. Varriale, G 2012, Barclays rate-fixing scandal: Libor alternatives analyzed, International Financial Law Review, p. 68. Weldon, J 2013, The Libor Manipulation Scandal & The Wheatley Review: A Band-Aid On A Knife Wound, Syracuse Journal of International Law & Commerce, 41, 1, pp. 199-227. Read More