treasury select committee: libor hearings July 10, 2012
Posted by Bradley in : financial regulation , add a commentThe Committee published letters between the FSA and Barclays which have been the subject of discussion during Marcus Agius and the Committee today. Adair Turner expressed the FSA’s displeasure in April 2012 with Barclays’ behaviour. He wrote:
it is of course acceptable for a bank to argue for a favourable approach on any one specific issue, even if the regulator does not immediately agree. But the cumulative effect of the examples set out above has been to leave us with an impression that Barclays has a tendency continually to seek advantage from complex structures or favourable regulatory interpretations. These concerns are sufficiently great that I felt it was appropriate to communicate them directly to you, and to urge you and the Board to encourage a tone of full co-operation and transparency between all levels of your Executive and the FSA.
When questioned about this, Agius says that the job of a regulated firm is to act absolutely within the regulations but that they also operate within an extraordinarily competitive international industry and, within the constraints of regulation and law, their job is to do the best they can for their stakeholders. Earlier he commented that when a bank deals with its regulator it isn’t like dealing with a speed cop about driving over 30 mph in a 30 mph zone – it’s more complex than that.
The Committee spent a lot of time on the question whether Diamond misled them last week – before these letters were made available – about how the FSA characterized Barclays’ attitude to regulatory compliance in early 2012. The Committee focuses on Turner’s letter as representing the FSA’s attitude and Agius tries to argue that Diamond had been referring to Andrew Bailey’s earlier visit to the Barclays Board. Given the wording of the April 12th letter it’s difficult to understand how Agius thinks he can succeed in soft pedaling what was going on. In response to a characterization of the April 12th letter as “damning”, Agius says it is a “firm” letter from a regulator.
Members of the committee expressed surprise that Barclays does not record Board meetings (an intriguing idea for corporate governance reform, but surely unlikely to be adopted), and about the number of things Agius claimed not to know about. At one point he reminded the committee of the limited role of a Board. He resisted attempts to get him to express views on what Diamond was doing last week, or at various points during his tenure at Barclays.
For “a formidable financier with an eye for detail” I did not find Agius’ performance to be impressive. On the other hand he did spend quite a bit of time in the hot seat without saying very much (apart from the fact that King sought Diamond’s resignation and about how much Diamond will take when he walks away) and perhaps that was the point. But he didn’t give a very good impression of the state of UK banking.
more libor, more questions about financial regulation July 9, 2012
Posted by Bradley in : financial regulation , add a commentPaul Tucker spoke to the Treasury Select Committee this afternoon, denying that the Bank of England had any responsibility with respect to Libor or the BBA, commenting on how difficult things were during the financial crisis, and expressing support for a twin peaks system of financial regulation. Of course these hearings are happening at a time when the UK Parliament is addressing issues of financial regulation with a Financial Services Bill in progress and a Banking Bill to come. Some of the personnel involved in regulation will continue to be involved in the new regimes, so those people have an interest in influencing how the changes are made. And one issue is how much enforcement power the regulators have. Members of the committee noted that the Barclays settlement resulted in significant part from the efforts of the US agencies involved. Regulators often want to blame problems on other jurisdictions. For example, giving evidence on swaps to the House Financial Services Committee Gary Gensler of the CFTC said last month (with a number of specific examples of harm caused to the US by actions outside the US in other regulators’ jurisdictions):
Balanced implementation of regulatory reform requires an acknowledgment that the activities of financial institutions engaging in transactions or setting up operations abroad can pose a profound threat to U.S. taxpayers and the economy.
Was it convenient for the CFTC/DOJ that the first bank to settle over Libor was not a US bank? Citigroup and JP Morgan are among the targets of investigators.
Michel Barnier has also commented on the Libor problem:
L’actualité le démontre avec l’affaire Barclays et la manipulation du taux de refinancement des banques, les comportements scandaleux restent possibles sur les marchés financiers. Les travaux sont en cours au sein de votre Commission pour renforcer la lutte contre les manipulations de marché et sanctionner les abus… Je considère que nous devrons sans doute renforcer ces textes pour couvrir plus directement de telles manipulations.
serious frauds office to investigate libor July 6, 2012
Posted by Bradley in : financial regulation , add a commentHere is the SFO press release. Here is the link to yesterday’s House of Commons debate on professional standards in banking. Reading the debate isn’t very edifying. Much more attention seems to be focused on finding ways to blame the last government for failures in regulation than on how to regulate better for the future. And it is mind-blowing to see the Chancellor blaming what has happened on failures of regulation when before the financial crisis Conservatives were even more vocal than the last Labour Government about how regulation shouldn’t interfere with the ability of UK banks and the City to compete with banks based in other jurisdictions and other financial centres.
libor: politics and financial regulation July 5, 2012
Posted by Bradley in : financial regulation , add a commentBob Diamond appeared before the Treasury Select Committee yesterday to discuss Libor. On one level the reviews in Parliament and at the FSA are supposed to be about working out how to ensure this particular problem doesn’t recur. And the options on the table seem to be very focused on Libor. Should the regulators require that Libor be based on transactions rather than on opinions, should setting Libor be a regulated activity etc. We have seen some hints that the issue is seen as part of a larger issue – the banking culture issue – but that is both more significant and harder to find a regulatory fix for.
There’s another larger issue here. Financial stability concerns make regulators focus on systemically important financial institutions (for example this recent Basel Committee Consultation on domestic systemically important banks). But what about trying to identify the point at which practices become systemically important? Some years ago, when Libor was a bespoke rate fixed by mechanisms specified in individual transaction documents it wasn’t one rate that all could use. According to the BBA’s website, banks asked it to work on providing uniformity:
The BBA was asked by the banks it represents to bring a measure of uniformity into the market and to devise a benchmark to act as a reference for these new instruments. Rather than negotiating the underlying rate or forming rates by taking averages of ad-hoc panels, banks could now use a standard rate. This facilitated the operation of markets and made benchmarking more transparent and objective.
The standardization of Libor increased its use as a rate of interest across a range of transactions around the world. But standardization may be a source of systemic risk if it makes particular behaviours more pervasive. We know that the way in which securitizations were structured involved invisible systemic risks. We are dealing with issues around the regulation of derivatives. But all of these issues are linked by standardization of financial transactions and practices.
Then there’s the politics. Did the Government or Bank of England encourage banks to manipulate Libor during the financial crisis. This issue is going to hang around for a while. The press likes it. Paul Tucker wants to speak to the Treasury Select Committee to clarify what he said in October 2008. But any financial regulation, and a lot of normal governmental activity, affects the way the markets work. Rescues of failing financial firms involve some manipulation of the financial markets. Will Spinney at the ACT gives a number of examples of governmental manipulation of financial markets. I wrote a short paper about the crisis where I said:
The global financial crisis thus renders visible and urgent a perennial (although often ignored) tension in financial regulation with respect to the extent to which governments should intervene to fix the financial markets.
This issue deserves more serious consideration than the irresponsible throwing around of partisan criticism we are seeing – reminiscent of snowball fights in a playground (or whatever they do at Eton) – that it is getting. Precisely what governmental interventions in the financial markets are legitimate, and what are not?
update: Note Jonathan Portes:
The lack of discussion about the structure of these key funding markets in any of the UK banking reform proposals is a very serious omission.
barclays written evidence to treasury select committee re: libor July 3, 2012
Posted by Bradley in : financial regulation , add a commentBarclays has published its written evidence for tomorrow’s hearing. The document raises some points I think are important.
First, the document states:
The traders’ behaviours captured within the settlement documents are not representative of the values and standards to which the vast majority of the 140,000 people that work at Barclays operate every day. Those colleagues serve with integrity; pride; and the utmost probity. They have been badly let down by the actions of a few.
There’s a confusion in the reactions to the scandal. On the one hand there is a problem in the culture of banking (especially investment banking) (see King, Osborne). On the other, there are the thousands of decent and upstanding people who work for banks. Andrew Tyrie (who is to run the Treasury Committee’s review) said yesterday:
By any standards, the LIBOR scandal, for which 20 banks around the world are now being investigated, is shocking. It has corroded trust in the UK financial services industry and it is a shameful affair. I find it particularly sad that it will have unfairly damaged the reputations of hundreds of thousands of our constituents who work hard and honestly in the financial services industry. The UK’s reputation has been tarnished, but it can be restored and enhanced if we draw the right lessons. The Treasury Committee will continue with its inquiry into what exactly happened. We will be holding the inquiry on Wednesday with the chief executive of Barclays, and we will also probably call the British Bankers Association and the regulators to find out exactly how this all happened.
There are some important questions here: did Barclay pick the wrong people to be responsible for making its Libor submissions, or did it not protect them sufficiently once they were in that position from the persuasions of a few bad apple traders? Do we need solutions aimed at ensuring only honest people are given such positions, or do we need to ensure that structures are established to protect people from weakness of character.
Second, Barclays states that it is:
ironic that there has been such an intense focus on Barclays alone, caused by our being first to settle in the midst of an industry-wide, global investigation.
Perhaps they should have better crisis consultants. The investigation into Libor fixing had been going on for some time, and was generally known to be ongoing. So the announcement of the first settlement in the context of the investigation was bound to attract attention, and the fact that the settlement related to behaviour before the financial crisis as well as during the crisis was startling (and the co-mingling of acts during these two different periods is generally problematic – much attention is focused on whether the Bank of England is to blame in relation to the crisis-related quotes) and bound to be noticed.
However, if it were to turn out that Barclays and its personnel were in fact more co-operative than other banks and suffered more in terms of harms to reputation and resignation than other banks and their personnel who were not so co-operative this would be a very bad thing for the future of financial regulation. It would be an invitation for targets of regulatory probes to be unco-operative in future.
libor developments July 3, 2012
Posted by Bradley in : financial regulation , add a commentYesterday, Marcus Agius, the Chairman resigned and then Bob Diamond, the CEO, resigned with Agius becoming full time Chairman and in charge of finding Diamond’s replacement. Jerry del Missier, the (recently appointed) COO (who was at Barclays Capital during the period of the Libor problems), also resigned. Mervyn King seems to have played a role in these developments. Monday’s announcement of Agius’ resignation was pretty clearly designed to protect Diamond. After all, the press reports before Monday focused on whether Diamond’s position was secure.
The Treasury Select Committee will hear from Diamond at 2pm on Wednesday.
The Chancellor made a statement in the House of Commons yesterday. He was very critical, asking, for example:
what urgent changes are needed in the regulation of LIBOR and other markets to prevent such abuse occurring again and to ensure that the UK authorities have the powers they need to hold those responsible to account; and the wider issue of what went so badly wrong in the culture of our banking system and the way it was regulated, allowing such fundamental failures of basic standards of conduct to go unchecked and unchallenged.
The interest rate manipulations were pretty shocking, but Osborne lives in a world where politicians have exaggerated their expenses claims and been over-friendly to unsavory news organizations. Perhaps he shouldn’t be so surprised.
A number of MPs pointed out that Osborne and other Conservatives hadn’t been so keen on regulating banks when they were in opposition. For example, here’s Glenda Jackson:
welcome the Chancellor’s commitment to broad-ranging and hard regulation for the British banking system—a position eschewed like the plague by his colleagues when they were in opposition. Will he guarantee that the powers given to the FSA will ensure that it is genuinely what many of my constituents have campaigned for for some time: a banking watchdog, not a lapdog?
Anyway, there will be a review of what needs to be done to fix regulation relating to this issue by Martin Wheatley, the chief executive designate of the Financial Conduct Authority. The review:
will include looking at whether participation in the setting of LIBOR should become a regulated activity, at the feasibility of using actual trade data to set the benchmark, and at making initial recommendations on the transparency of the processes surrounding the setting and governance of LIBOR.
His report will be produced “this summer” so that any conclusions can be fed into the new rules on financial regulation, either in the Financial Services Bill or legislation on banking reform.
The House of Commons spent some time wondering why what happened wasn’t a criminal offence (especially when they had constituents who had been charged with criminal offences over much smaller sums of money). That the SFO decided not to prosecute doesn’t necessarily mean it decided that no crime had been committed but could be based on concerns that it would be difficult to achieve a conviction.
The language of section 2 of the Fraud Act 2006 does seem to be broad enough to cover what was done. Under s. 2 a person commits fraud by dishonestly making a false representation, and intending by doing so to make a gain for himself or another. A false representation (which may be express or implied) is one which is untrue or misleading, where the person making it knows that it is, or might be, untrue or misleading.
False representations to the BBA about the rates at which Barclays could borrow funds in the interbank market could be seen as falling within this very general language. But the statute does not expressly cover statements whose effects are indirect. The explanatory notes on s 2. make it clear that the provision is meant to refer to representations made to the world at large (on a website) or to large numbers of people (such as phishing). But the explanatory notes seem to imply that what the section applies to is situations where representations are made directly to the victims of the fraud. There’s a specific provision for representations made to machines (such as ATMs). The explanatory notes state:
The main purpose of this provision is to ensure that fraud can be committed where a person makes a representation to a machine and a response can be produced without any need for human involvement. (An example is where a person enters a number into a “CHIP and PIN†machine.) The Law Commission had concluded that, although it was not clear whether a representation could be made to a machine, such a provision was unnecessary (see paragraph 8.4 of their report). But subsection (5) is expressed in fairly general terms because it would be artificial to distinguish situations involving modern technology, where it is doubtful whether there has been a “representationâ€, because the only recipient of the false statement is a machine or a piece of software, from other situations not involving modern technology where a false statement is submitted to a system for dealing with communications but is not in fact communicated to a human being (e.g., postal or messenger systems).
But this situation is different from the sort of indirect representations made in the context of any attempted manipulation of Libor rates. And this sort of uncertainty is problematic in the context of criminal statutes.
libor review June 30, 2012
Posted by Bradley in : financial regulation , add a commentThe government is to order a review of the operation of the inter-bank lending rate, or Libor, following revelations of its frequent abuse by Barclays and other banks.
uk regulators on financial regulation June 29, 2012
Posted by Bradley in : financial regulation , add a commentSome highlights from the Bank of England’s press conference about the June 2012 Financial Stability report (the Report is available here):
Mervyn King and Adair Turner agree there is a major cultural challenge especially with respect to investment banking.
King says that Libor should be based on actual market transactions, not on quotes (and that it looks more likely now that this will happen than before the beginning of this week) although he and Turner recognise than there are difficulties in relying on transactions in thin markets.
King and Turner seemed to like the idea of the ECB taking on responsibility for banking regulation, but within the Euro area and not for the entire EU (and the details could be complicated).
The participants seemed convinced of the need to separate out basic banking and investment banking (and that the issues of culture raised by the Libor manipulations are connected to this separation).
banks behaving badly: libor scandal, banking culture, more mis-selling June 29, 2012
Posted by Bradley in : financial regulation , add a commentWere the Barclays settlements really A Victory for Regulators (as the front page of the New York Times Business section proclaimed yesterday)?
An e-petition for an inquiry into bankers’ behaviour is now available for signature here (submitted by Ann Pettifor, Director of Prime, “an economic think-tank that promotes understanding of the nature of credit”). Mervyn King says no inquiry is necessary (although he does say there need to be changes to the culture and structure of the banking industry). Cameron agreed with King.
With respect to the Barclays Libor-related conduct in the pre-financial crisis period, Bob Diamond said (in a letter to Andrew Tyrie MP, the Chairman of the Treasury Select Committee):
This inappropriate conduct was limited to a small number of people relative to the size of Barclays trading operations, and the authorities found no evidence that anyone more senior than the immediate desk supervisors was aware of the requests by traders, at the time that they were made. Nonetheless, it is clear that the control systems in place at the time were not strong enough and should have been much better.
There’s a lot in the letter about how important Barclays thinks it is to rebuild trust and fix its systems, and of course much about how lots of other banks behaved badly too. I’m not sure how much that helps Barclays really. After all, the people who are upset about this issue are upset as much because it reinforces their belief that bankers in general can’t be trusted. That it is not just about Barclays makes it worse rather than better.
And, to top it all, there’s more news about bad behaviour by banks from the FSA today: Barclays, HSBC, Lloyds and RBS agreed to provide redress with respect to the mis-selling of interest rate hedging products to some small and medium sized businesses (SMEs).
But when the US Supreme Court holds that the First Amendment protects our right to tell lies (in US v Alvarez, finding the Stolen Valor Act to be unconstitutional), unless we are actually committing fraud or doing a rather limited number of other bad things, why should we expect banks to be careful about what they say?
(update: link to Bank of England webcast of press conference about the June 2012 Financial Stability report, held today).
bba statement on libor enforcement June 28, 2012
Posted by Bradley in : financial regulation , add a commentThe British Bankers’ Association is shocked by yesterday’s report about LIBOR. The banks which contribute to the LIBOR rate must meet the necessary obligations to their regulators. The BBA has proactively co-operated with the authorities at every stage and will continue to work with the regulatory investigations into LIBOR, submitting information and making staff available for interview.
The current LIBOR review, with which our authorities are fully engaged, has been underway since March this year and is considering all aspects including the setting process. As part of this review we will now be asking the authorities to consider in what manner the LIBOR setting mechanism should be regulated in the future.
It is becoming clear that these enforcement actions haven’t increased confidence in the financial system.
Meanwhile, on the issue of sanctioning individuals – something many people commenting on this story have advocated – I was reading a fascinating article by William Simon with the title Where is the “Quality Movement” in Law Practice?. The article is about lawyering rather than banking , and I was reading it for a piece I am working on about peer review, but Simon suggests that when things go wrong there is often an impulse to sanction individuals rather than to fix the procedures which led to the problem:
Law firms appear spontaneously inclined to take the individual perspective. When they are caught in a scandal, they often look for individual wrongdoers and respond by disciplining or firing them.22 A consultant for liability insurers tells me that, when he visits a firm where serious professional failure has occurred, the most common response he hears is, “We had a problem, but we got rid of him.â€
I think that traders who encourage people who have a role in the development of Libor and Euribor to change the quotes they feed in to the system to suit the interests of the traders, as well as the quote submitters who go along with the traders, are not fit and proper people to be employed in financial firms. And figuring out how to prevent this sort of behavior is critical. But firing one or two scapegoats is not the answer.