Barely a week after London-based Barclays Bank Plc was fined a record £290 million (Rs 2,500 crore), for allegedly participating in the fixing of the London Interbank Offered Rate, or Libor, by regulators in the US and the UK, its chairman Marcus Agius and outspoken CEO Robert Diamond have finally resigned, though Mr Agius will still run the bank at least till a new chief executive is chosen. Mr Diamond, who was at the helm of Barclays Capital at the time that the division’s employees were knowingly submitting incorrect information to the British Banking Authority, will still have to face enraged members of the British Parliament on Wednesday, as the inquiry into the fixing of Libor continues. This is another blow to the embattled City of London’s reputation as a financial centre, and to that of big banks themselves. For Barclays, the fine equals half its total dividend payout of last year, and so the impact on its shareholders is considerable.
Libor is central to how money-market rates, and thus interest rates for home and other loans, are set. It is supposed to reflect the degree of trust in the financial system. The British Banking Authority collects quotes for interbank lending rates on loans of varying tenures daily from a set of large, well-respected global banks – including Barclays, the Union Bank of Switzerland, Citigroup and the Royal Bank of Canada – discards the high and low figures, aggregates the rest, and releases the composite data at 11 a m GMT every day. A meticulous investigation into Libor rates between 2005 and 2009, led by the UK’s Financial Services Authority (FSA), discovered that Barclays employees regularly submitted quotes first too high and then too low during that period. They were responding to requests for assistance from colleagues playing the markets, and investigations are proceeding into whether instructions from higher up – and even tacit approval from some within the Bank of England – existed, too.
Barclays, in the end, might not even turn out to be the worst offender. The FSA’s investigation followed whistleblowing by the staffers from Barclays responsible for submitting the rates, who informed the bank’s vigilance division, which then bumped the problem up to the regulator. Barclays employees have claimed that they held out as long as possible when submissions from other banks were way off target — and eventually started cooking the rates when the financial crisis grew acute, and they worried that Barclays looked like it was paying a higher risk premium for capital than other banks. Of course, that isn’t the whole story — some submissions seem to have been made keeping in mind Barclays’ repayment and borrowing schedules. But observers can be genuinely concerned that the entire banking system is complicit in rigging Libor, and more large fines will follow. The problem is that here, as elsewhere in the financial system, incentives were not properly aligned and self-regulation was substituted for active regulation. The lessons of the financial crisis have been underlined: an overly light regulatory touch is inappropriate for finance, and it is the largest and best respected of institutions that can do the most damage.