As news of the swingeing fines against Barclays Bank Plc have emerged, accompanied by press and political comment, the City’s word needs ever increasing scrutiny.
LIBOR and EURIBOR rates are based on submissions from a number of banks that are then collated using a methodology that uses an average of those rates once the outlier rates that have been submitted have been eliminated. These rates set international benchmarks for borrowing in the City, in international financial markets and for interest rate derivatives. Reliance on these rates is fundamental to the operation of many financial contracts around the world.
To give some idea of the enormity of the transactions that rely on these rates the Financial Services Authority in its final notice to Barclays notes that “the notional amount outstanding of OTC interest rate derivatives contracts in the first half of 2011 has been estimated at 554 trillion US dollars. The total value of [the] volume of short term interest rate contracts traded on LIFFE in London in 2011 was 477 trillion euro including over 241 trillion euro relating to the three month EURIBOR futures contract (the fourth largest interest rate futures contract by volume in the world).”
The mechanisms for its calculation relied on institutions being transparent about the rates available to them. The final notice describes how the team submitting the rates on behalf of Barclays took into account requests from their derivative trading teams and even outside traders to influence the submissions they made on behalf of Barclays. The bank also took into account its own liquidity problems during the financial crisis to influence its submissions. The full details (click here for a link) in the final notice of the FSA highlight the level of complacence that existed in the process even when these matters were being raised with compliance teams and external agencies such as the FSA itself.
What this regulatory action highlights yet again is the huge reluctance of large financial institutions to question the rights and wrongs of what has become market practice or customary modes of behaviour. It takes a brave person to challenge it, even when they are in a compliance or risk role. Attending courses on ethics is never sufficient to create a change in culture which challenges and examines right from wrong and takes pride in doing so. Barclays is a profit making institution – an £85m fine reduced to £59.5m for cooperation is hardly going to break the bank even though its reputation is bound to take a severe knock. The value of its shares and regulatory capital requirement will be affected (I am a small shareholder, so I see it first hand). Even additional fines from across the Atlantic by the US regulators will not make a debilitating financial dent to its pocket. It will be regarded as a cost of doing business – even a cost of surviving, in the face of the meltdown in the financial markets. At the cost of a few heads that will roll, it will survive the publicity. So will the other banks, who as sure as night follows day will not be guiltless of breaches, as is evident from the other regulatory actions and Barclay’s complaints. Complaints made whilst remaining silent about some of its own activities despite the extensive cooperation it subsequently gave to regulators.
In the meantime what should one make of the City’s word when it reports numbers such as those relating to LIBOR? Increasing regulation is hardly the answer. Large compliance departments have evidently not provided a solution either. The regulatory action itself has taken years to investigate and crystallise and can hardly be regarded as timely intervention. Another public enquiry perhaps? More words and the rattling of cages? If ghosts past are anything to go by, they seem to be loud and empty vessels. Can there ever be a practical solution that neatly and transparently balances the competing interests?
A business culture where independent challenge is encouraged and accepted as healthy and not career limiting is much more likely to be productive in enhancing the City’s word as its bond. That is more likely to result in an environment where it is safe to question right and wrong and to arrive at reasonable, transparent solutions, rather than be forced to be a whistleblower with all its consequences on a career. To achieve such a culture is a real challenge and much, much easier said than done. But it has to be the gauntlet that the City’s institutions should be prepared to take up because it is essential that they are trusted and survive.
©Jaitly LLP