Focus on regulation – Libor under fire

Regulators worldwide are considering what their next steps are in regards to the Libor rate-fixing scandal that is swallowing a growing number of banks, in Europe as well as the UK.

UK bank Barclays has lost its CEO and chairman to the scandal, but has at least ended its dealings on the matter with UK and US federal regulators by agreeing to pay a fine.

Six other banks, including UBS and Deutsche Bank, are believed to be in line for questioning in America, over the issue, while some of the banks have received subpoenas from the attorneys general of New York and Connecticut.

We review below what some market figures have said of the issue so far.

Martin Wheatley, UK Financial Services Authority (speaking on Bloomberg TV)
This system is completely unregulated. There is no code of conduct in the martin-wheatleybanks, there is no approved regime for the people who are submitting and we, as a regulator, don’t have any sort of hold over the rate process. Whatever else happens, there needs to be some regulatory framework that sits around what has become absolutely a globally important benchmark. It may seem odd now, but Libor didn’t fit within anybody’s responsibility. You could argue well maybe it should have done and maybe we should have asked the question ten years ago. We’re asking the question now. The response has to be that it is much more central to the regulator’s remit.

Eric Veiel, T. Rowe Price portfolio manager
The Barclays traders cited in the settlement documents publicized by the ericveielt-rowe-priceCFTC and FSA displayed morally bankrupt behavior that could tarnish the entire financial services industry. Yet again, we see an example of how the actions of a few can undermine the efforts of the many. I believe this settlement is the first of many more to come as Barclays was not alone in its actions. In addition to regulatory fines and possibly criminal charges, there is the potential for significant civil monetary damages. The overhang that this type of open-ended liability can create will be a significant challenge for the banks involved in this latest financial scandal.

Christine Johnson, Old Mutual Corporate Bond fund manager
It’s yet another blow for a sector which is already in a fairly powerless state; it seems to be one scandal after another or one capital problem after christine-johnson-finalanother. It’s been focused on Barclays because of the fines imposed both here and in the US; however, as more information is coming out we’re seeing that this was an industry-wide practice, and also that it’s something which potentially the regulator and even the Bank of England are being implicated in. In terms of the fines the amounts are manageable. In terms of potential civil law suits, it’s very difficult to quantify how much that will be, but one thing we can do is look at other industries which have been subject to some kind of class action. If you wish to extract damages on that scale it’s important that that industry remains functioning and able to pay. It might be a multi-year drain on earnings, but it shouldn’t a capital event.

Robert Montague, ECM
Barclays £290m fine by UK and US regulators for attempted manipulation of Libor [led to] its shares falling 16% in one day and credit spreads robert-montagueunderperforming. At least superficially the equity market reaction seemed rather extreme, given that investors had known for some time that the regulators were investigating all the major international banks on this issue and the magnitude of the fine was not particularly exceptional, but investors are now concerned about the potential size of civil lawsuits that may ensue. This is clearly not only an issue for Barclays but for all the major international banks involved in setting Libor.


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