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Further de-regulation coupled with empowerment of the Bank of England is needed to stop Libor fixing type behaviour.
Barclays' actions in fiddling the London Interbank Offered Rate (LIBOR) were appalling, though it is unlikely that further regulation is the answer.
One commentator, Professor Ferguson, says it is difficult to come up with appropriate regulation to monitor bankers in such situations like rate fixing.
He is right.
Regulation is fundamentally about risk control, but the risks associated with Libor due to its widespread usage are difficult to identify, as is the specific conduct of setting Libor through meetings between banks that would have to be regulated.
The current extensive system of regulation did not prevent the financial troubles of banks in 2007, nor did it stop the fixing of Libor. Hence the remedy to one of act of deceit of rate fixing would be unlikely to be found in further regulation.
There is now a very compelling argument that regulation gives false market security that encourages misfeasence in banks and banking misconduct.
It must not be forgotten that the Libor rate is actually set by representatives of banks themselves, regarding (as it says on the tin) what they could borrow from other banks at a determined time.
Libor is a rate determined on a mathematical average. It is the average of the rates taken between 16 banks lending to each other that becomes the LIBOR rate. It is the average that Barclays has been accused of rigging (to a more profitable percentage).
It must not, however, forgotten at the outset that the rate itself is a figure 'fixed' by the banks in the same way a bank might set a rate for a mortgage to a house purchaser, and there is nothing inherently illegal in that.
However, where Barclays failed was in telling the inter-bank lending committee the truth. Here may possibly be a role for criminal sanction, due to the widespread use of Libor- despite the enormous practical difficulties of prosecuting and proving deceit and fraud.
Criminalising such rate fixing, may still not avert the risk of losses related to Libor with the average fiddled with as there is still the one off potential of a bank fixing rates despite the existence of criminal penalties.
Criminalisation, an excessive measure, would be justified due to the widespread usage, and potential losses associated with using Libor. (It is used, for example, to set the rate of interest on damages in complex international litigation).
However it may be an effective option if combined with reducing (the misleading) role of banking regulation and shifting strong powers of fines and revocation of banking licences back in the hands of the Bank of England.
The Bank of England has the advantage of a regulatory organ in that it has a commercial relationship to be maintained with the banks for a public purpose which allows close professional control, but also beacuse at the same time it must give primacy to its role as the bank of the state.
Much of the problems related to bank misbehaviour are due to over-regulation, than under-regulation.
They are to do with emasculation of the Bank of England, particularly the removal of its power to annul bank operating licences. The FSA is a weaker regulatory model in contrast to the possibility of absolute power entrenched in the Bank of England with a power to fine leading to revocation.
Banking misbehaviour is also related to encouraging lack of bank accountability through bailouts.
An alternative, and radical idea, to solve these misfeasence problems is to introduce competition to the state controlled financial model by introducing private currencies. Then banks can be controlled by markets through the one thing that motivates them and can controls them: profit.
Naughty banks can go bust and be absorbed by better behaved ones, and regulatory failures of the Bank of England will put pressure for the central banks board to be changed through competitve alternative currencies working in the same national market.
[Above Bob Diamond, former Chairman of Barclays].
July 15, 2012 Comments (0) | Permalink
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Abhijit Pandya's blog
ABHIJIT PANDYA
Abhijit Pandya was a former lecturer in the Law Department of Durham University and a Teaching Fellow at the London School of Economics. He is currently the Executive Director of the Centre for Democratic Studies.
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