The LIBOR scandal has been hogging headlines of late, with questions
raised again about the extent to which big banks are now a law unto
themselves; the focus on Barclays obscures the fact that other banks are
likely to be found guilty of the same offence. The practice has been going on
seemingly since at least 2005. The scandal has not only attracted fines, but
it exposes the banks concerned to customer refunds and civil actions of
amounts potentially in multiples of their core capital.
It lends support to the view that banks have lost sight of their
responsibilities to their customers. This was the inevitable outcome of
London’s “big bang” in the early 1980s, when the banks
muscled in on securities-trading and derivative markets. The reason the rot
started in London was that the Glass-Steagall Act
restricted the ability of commercial banks to mix investment and banking
activities in the US, so Wall Street was ready to “move” to
London. The Conservative government in the UK took the hint and forced the
London Stock Exchange to open up its membership to banks.
Self-regulation for securities was thrown out of the window and
replaced by state regulation. Banking continued to be regulated by the Bank
of England until Tony Blair’s Labour
government passed that function to the Financial Services Authority, which by
then was regulating securities and insurance. The justification for state
control of financial services is and always was the protection of the public.
The reality has been a devil’s pact, with state interests being traded
for benefits for the banks. The state has been funded, and the banks have
become rich. The idea that this can have been achieved without market
manipulation by both parties working together is simply naïve.
Manipulating central banks are actually the worst offenders, usually
depressing interest rates hundreds of basis points below where they would
otherwise be, and by contrast anything commercial banks do on their own is
small beer. The deliberate mispricing of the cost of borrowing is after all
necessary to generate demand for money and credit. All interest rate
manipulation has winners and losers, and the idea that agents of the state can
manipulate rates without having a moral case to answer is no more than a
statist point of view.
The importance of the LIBOR problem is it forces people to reflect
more on the nature of modern banking: many were already forming the view that
it is thoroughly rotten. By all accounts, Barclays, which has now lost key
executives, was not the greatest sinner. We are left wondering how many more
senior bankers at other banks will be removed from office, and who in their
right mind will replace them. The attraction of being an executive director
of a large commercial bank has always been about power; the power has now
gone and there are other ways of wielding financial muscle out of the
The likely result of LIBOR-gate is that banking itself is in decline.
Bureaucracy is driving out talent and banks are becoming less profitable. The
British Government, which is dependent on the banking system for funding and
underwrites the whole system, will be the ultimate loser.
Orginally published on Goldmoney here