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Are Banks Embarrassed? Keeping Rates Anonymous May Ensure Honesty

Written by Jennifer Byrnes
Edited by Sarah Mejia

British regulators presented new regulations to facilitate an overhaul of the London Interbank Offered Rate, commonly known as Libor, in December of 2012. Martin Wheatley, a top regulator at the U.K.’s Financial Services Authority, recommended several changes, one of which will sever the banking industry’s control over Libor (Enrich). Among other smaller changes, Mr. Wheatley feels that anonymous reports will prevent banks from reporting false data for their own commercial gains.

Libor is currently administered by the British Bankers’ Association and represents the average cost banks pay to borrow money from each other (Enrich). The number has become a benchmark for lending rates all over the world. A settlement between regulators and Barclays has revealed that the bank had been inaccurately reporting data; they were fined £290 million. Additionally, UBS was also fined £940 million for its position in the rate-fixing scandal. The Royal Bank of Scotland was the third bank to be penalized; RBS faces a fine of £390 million.

Banks occasionally are found to be reporting rates at an artificially low number to appear healthier. U.S. and U.K. officials are now investigating the degree to which the other banks involved in setting Libor knowingly reported false data. To start clearing up the mess, Mr. Wheatley invited organizations to bid to take over control of Libor (Enrich). The BBA, which is currently in control of Libor, was made aware of this decision and stands behind it.

This move will tackle what may be the most glaring issue with Libor: removing the control of the rate from the BBA, which directly benefits from a lower set rate. Mr. Wheatley states that Libor needs to be regulated by “someone who can bring integrity and believability back into the system” in an interview in late September (Enrich). The FSA would also “gain the authority to punish individuals who tried to manipulate the rate, a power the agency currently lacks” (Enrich). In addition to recommending a third-party intervention for control, Mr. Wheatley offered several smaller changes, including keeping the submissions private for three months. This would make individual banks’ rates anonymous and possibly reduce the likelihood of reporting artificially low numbers during times of economic stress.

Do banks really need this veil of secrecy to report honest data because they fear the stigma of reporting high rates? If so, then they should be granted it. While this approach will most likely result in a higher Libor, at least it will accurately represent the market. The top bank managers may not get the returns they would get with a low Libor, but this would be incentive to legitimately lower rates. In the long run, anonymity would align the banks’ interests with market interests, a link that is currently missing. Not to mention, it would help the banks avoid some hefty fines and messy lawsuits.

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**Due to technical difficulties we recently had to switch domains and transfer all of our website content.  Please keep in mind that while we have been publishing articles for two years, the published dates shown may not reflect the initial publish date.

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Cauchi, Marietta. “Libor Q&A.” Wall Street Journal. Dow Jones and Company, 16 July 2012. Web.

Grote, Daniel. “UBS Fined $1.5bn over Libor Fixing.” Citywire Money. Citywire, 19 Dec. 2012. Web. 24 Mar. 2013.

Enrich, David. “U.K. Unveils Plans For Libor Overhaul.” Wall Street Journal. Dow Jones and Company, 28 Sept. 2012. Web. 2 Nov. 2012.

McGagh, Michelle. “Barclays Fined £290m for Fixing Bank Lending Rates.” Citywire Money. Citywire, 27 June 2012. Web. 24 Mar. 2013.

McGagh, Michelle. “RBS Fined £390m over Libor Scandal.” Citywire Money. Citywire, 6 Feb. 2013.      Web. 24 Mar. 2013.

Meady, Jessica. “New Libor; Higher Libor.” Wall Street Journal. Dow Jones and Company, 27 Sept. 2012. Web.

Mitnick, Barry. “Discussion of ‘Before Scandal, Clash over Control of Libor’ (WSJ).” Managerial Ethics and Stakeholder Management. University of Pittsburgh.Pittsburgh, PA. 11 September 2012. Lecture.

Mitnick, Barry. “Agent Capitalism.” Dinner address to the Katz Graduate School ofBusiness Board of Visitors. Pittsburgh Athletic Association, Pittsburgh, PA. 17 October 2002.

Paletta, Damian. “Panel Examines Libor Documents.” Wall Street Journal. Dow Jones and Company, 15 Oct. 2012. Web. 2Nov. 2012.

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