CA Pradeep G Bajoria
CA,MBA,DICM,B-COM
LIBOR
Libor is an average interest rate which is calculated from the interest rates given by key banks in London on a daily basis. It is controlled by the British Bankers Association in London. Libor is one of commonly used interest rate in the world for various loans & banking transactions. It is also used in derivatives transactions globally (especially in US derivate markets) which are one of complex contracts in the world.
Overview of LIBOR scandal
LIBOR was seen as a mirror image for the health of banks financial statements after the US crisis in 2008.
Over the past few months Barclays have been blamed for manipulating the LIBOR by presenting falsely low borrowing estimates making the LIBOR an incorrect representation of borrowing costs and affecting the short term interest rates all over the world.
In June 2012, Barclays agreed for manipulating the LIBOR and settled for a total fine of £291m (i.e. $ 453m) by UK and US regulators for manipulating the LIBOR.
But the question arises is, can Barclays alone could have significantly impacted the final LIBOR rate. Barclays would have submitted falsely low borrowing costs because it would believe that its rivals were also doing the same. If they had submitted higher estimates, it would have appeared to be in trouble.
It would be difficult for a single bank to do such a scandal alone due to which now many large banks such as HSBC, Royal Bank of Scotland, Citigroup, Deutsche Bank, JPMorgan, UBS etc are under the scanner of US regulators as it is assumed that at least 1 more bank must have join together with Barclays in an attempt to manipulate LIBOR, which are used as a point of reference to price trillions of dollars of financial contracts.
Should LIBOR be scrapped?
Manipulating LIBOR is a serious crime as it not only allowed the banks to illegally cook their own profits, but also because this rate affects the economy of many countries.
This rate affects a wide range of financial transactions globally and not just in UK or US as it is used globally for trillions of dollars worth of financial contracts. If LIBOR can’t be fixed or some substitute which is less vulnerable to manipulate can be put in place then LIBOR can be scrapped.
Therefore, it is clear that urgent reform of the LIBOR compilation process is required. Such reform may include modification of existing technical definitions used for LIBOR, the associated governance framework and the role of official regulation.
Apart from the above mentioned reforms in LIBOR, Information Technology should also be made robust so that such frauds can be minimized / eliminated.
As of now banks submit the actual interest rates they are paying, or would expect to pay, for borrowing from other banks. Instead of banks submitting the interest rates there should be proper IT system in place which is robust enough to take the rates directly from the market. Also IT system should be capable of giving alerts in case of wide fluctuation in interest rates on daily basis.
Thus in my opinion a good reform with a robust IT system could help the regulators to revive the LIBOR instead of scraping LIBOR.
(The author is working as a functional consultant in Banking and Financial services group with Tata Consultancy Services Ltd and can be reached at his email id pradeep.bajoria@tcs.com)
Thank You Pradeep Sir,
Pradeep
Good article…i/o scrapping LIBOR govt should bring good reform & make LIBOR more & more robust
Sir,
“Therefore, it is clear that urgent reform of the LIBOR compilation process is required. Such reform may include modification of existing technical definitions used for LIBOR, the associated governance framework and the role of official regulation.”
“Thus in my opinion a good reform with a robust IT system could help the regulators to revive the LIBOR instead of scraping LIBOR.”
Sir, Let me agree with your opinion of a good reform.
Regarding reform, please bring back your following expression from your article:
“Therefore, it is clear that urgent reform of the LIBOR compilation process is required. Such reform may include modification of existing technical definitions used for LIBOR, the associated governance framework and the role of official regulation”
Under line words ‘reform of the LIBOR compilation process is required’.
Sir, please help me to understand what sort of compilation process, you would like to expect or advise them?
Your ‘REFORM PROCESS of LIBOR’ may enlighten the future.
Your feelings are right to conclude that “Manipulating LIBOR is a serious crime as it not only allowed the banks to illegally cook their own profits, but also because this rate affects the economy of many countries”
Thanking you, Sir.
Venkateswara Rao Sapare, Hyderabad
useful article.. thanku pradeep