A Headache for Financial Regulators

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Protesters from the World Development Movement outside the Barclays annual general meeting in London, UK. Photo - PA

As the saga of the LIBOR manipulation goes on, it is important to not only look at the impact it will have on all the stakeholders involved in the short run, but also to look into how this will affect the financial markets in the long run.

London is the financial hub of the West and in order to integrate the capital markets in a better manner, a more uniform set of rules and regulations should be put into place. However, the effectiveness of any measures should also be flexible, nimble and adaptive and should be introduced into the system as soon as possible to limit the blowback that is being seen. One suggestion that is gaining traction is to use actual loan data to set the rates rather than a valueless figure which was the norm used by the banks in the days before the scandal was revealed. Regulators have a tough job ahead of them of putting something in place which is timely, accurate and appeases most of the stakeholders as well. This means that the regulators would need enough time to first gauge the scale and the intricate workings of the practice at hand.

Early findings have shown elements of collusion between the banks and a corporate culture of misconduct and secrecy which needs to be rooted out. This would require a reform and even overhaul of rules that guide the banks and would need to be recognised before all the aspects can be addressed. The impact of the investigation and fines is only the short term solution that is being put in place while long term solutions are expected in the pipeline in the form of reform of Banking Laws that exist across both sides of the pond. This scandal will also cause the fast tracking of certain other laws like the Dodd-Frank Act that is under works in the US which is supposed to avoid any crisis like the one witnessed in 2008. The British government is also looking to amend the Financial Services Bill which is in the Parliament considering proposals of not only fines but also criminal sanctions and actions against the people responsible.

One reality that has been faced in the past has been the powerful banking lobby on both sides of the Atlantic where they have moved to water down and make any such reform or regulation toothless. The red tape being put around Dodd-Frank Act itself and the amendments being put in it has made it ineffective as it is and the Act has had a hard time getting passed. The same can be expected of any reforms that might be proposed after this incident so regulators and lawmakers should swallow the bitter pill and take a step for the betterment of the system for once. Prioritising the financial system would bring back much of the investor confidence in the markets.

The thorough investigation planned will involve people from all the stakeholders from the Bank of England, Financial Services Authority (FSA) and private banks that use the LIBOR in their day to day operations. In addition, the Department of Justice has also gotten involved in order to quash any such activities within the borders of US as well. The purpose of the investigation is to look into the rates that were falsely quoted by the banks in order to widen the borrowing and lending spread that they gave to maximise their profits.

In addition, they could also tamper with the derivative instruments that were in place to earn more than they should have had. The analogy that can be used here is having the referees of a match being allowed to bet on the results. By being the ones who fixed the rate, they were able to join together to tilt the payoffs in their favour and then capitalise on the situation that spans over three years when the practice went unnoticed.

The first major scalp that has been claimed right now is of the Barclays Chairman Marcus Agius with calls on Bob Diamond, the investment banking head responsible for the manipulation. One of the goals of the investigation is to uncover these names which will be done in its due course. However, the real test will become when these names don’t get pushed in the background like Kenneth Lay, Jeffery Skilling and Andrew Fastow but to make examples out these people who want to gain any advantage over their competitors by changing the rules. Or more appropriately, fixing the rates.

Zain Naeem is the head of equity research at Maan Securities (Pvt) Ltd. He is a Lahore-based commentator with more than 3 years of experience in trading and research at the Karachi Stock Exchange and Lahore Stock Exchange. He enjoys writing and commenting on the finance front and presenting it to various audiences in different forums. Zain is deeply interested in politics, business and finance and is fascinated at how the three intermingle with each other.

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