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The losers of the Libor scandal

18 August 2012

12:01 PM

18 August 2012

12:01 PM

The Treasury Select Committee published its stinging report into Libor today, and it makes uncomfortable reading for all involved. ‘That doesn’t look good,’ committee chair Andrew Tyrie said when describing the failure of both the FSA and the Bank of England to spot the manipulation at the time. His committee’s report also pointed out that things did not look good for Bob Diamond’s ‘highly selective’ evidence, either, saying:

‘The committee found Mr Diamond’s attempt to subdivide the later period of wrongdoing [following his telephone conversation with Paul Tucker] neither relevant nor convincing. It does not appear that the conversation between Mr Tucker and Mr Diamond made a fundamental difference to Barclays’ behaviour, given the repeated instances of ‘low-balling’ submissions to the Libor fixing process by Barclays set out in the FSA final notice covering the year running up to the phone call between Mr Tucker and Mr Diamond.’

For Diamond, this is little more than a sting in the tail of the Libor scandal, given he has already relinquished his post at Barclays while hanging on to a tidy sum of money. He leaves a bank slammed for ‘serious failures’ of compliance and for the slow reactions of senior management. For other players in this drama, the conclusions have serious implications, too:

The Financial Services Authority

The FSA is the biggest loser in this report. The committee has demanded that the regulator spell out how it plans to improve its supervisory efforts for the future. The report points out that the FSA was two years behind the authorities in the US in opening formal investigations to manipulations of Libor, and says:


‘Unlike the Bank of England, the Financial Services Authority was the prudential regulator. Its shortcomings at this time are therefore far more serious. The Committee is concerned about the FSA’s failure to appreciate the significance of market rumours relating to the artificial rigging of the Libor rate.’

The findings of the FSA’s internal investigation should be published, the committee says.

The Bank of England

Sir Mervyn King’s Bank comes under fire for a ‘dysfunctional relationship’ with the FSA ‘which existed at that time to the detriment of the public interest’. The report criticises Deputy Governor Paul Tucker, who said possible clues of dishonesty ‘did not set alarm bells ringing at the time’. It says:

‘The evidence suggests that the Bank of England was aware of the incentive for banks to behave dishonestly, yet did not think that dishonesty was occurring. Nor did it appear to have asked the FSA to check to see if such dishonesty was occurring. With hindsight this suggests a naivety on the part of the Bank of England. They were certainly relatively inactive.’

The Spectator’s leading article this week is on the candidates for the next Governor of the Bank of England. It notes that they are not impressive. The Treasury Select Committee, which we recommend should grill each candidate as part of the selection process, adds to this impression in its report by criticising Lord Adair Turner’s Financial Services Authority and Paul Tucker’s Bank of England. The report also makes clear what the danger is of an inactive and naive Bank.

London

Quite naturally the committee concludes that Libor as a rate has suffered damage as a result of this manipulation. But it also hints that the slow response of the regulators in London could damage its reputation as a financial centre:

‘Attempted manipulation of these reference rates reduces trust and confidence in markets and carries costs for end users. The Committee is concerned that the FSA was two years behind the US regulatory authorities in initiating its formal Libor investigations and that this delay has contributed to the perceived weakness of London in regulating financial markets.’

The Parliamentary Commission on Banking Standards and the findings of the Wheatley review will paint a picture of the future of banking. It is vital that these lead to an improvement in the culture of financial services in this country, so that London’s prominence as a financial centre is not damaged in the long term.


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