Power of criminal sanctions: Libor reform effect on GCC business

Power of criminal sanctions: Libor reform effect on GCC business

Any reforms in setting Libor will affect the cost of doing business in the GCC and hence should be of importance to both lenders and borrowers...

September 24, 2012 2:27 by Muhammad Aldalou

As the aftermath stench of the infamous LIBOR scandal continues to linger, an international CFA Institute poll has revealed two important and reportedly conclusive opinionated results that could very well be useful when considering strategies in moving forward.

‘Actual interbank transactions should be used to determine LIBOR instead of estimated rates and regulators should be endowed with powers to pursue criminal sanctions over rate manipulations’.

The recently unfolded scandals of the London inter-bank offered rate, otherwise known as LIBOR, has had severe consequences that stretch further than the rolling of a few heads. Referred to as a ‘cesspit’, the scandal has severely undermined trust in banks on a global scale. For those that still remain unaware, LIBOR is an important figure that serves as a daily benchmark of rates at which banks can borrow at. In a nutshell, it is a “benchmark interest rate that affects trillions of dollars worth of loans” globally and is measured by the banks’ initial submission of estimated rates. An average is then calculated after the top and bottom quartiles are discarded.

At the peak of the financial meltdown that plagued the world’s economies in 2007; the major banks began to panic and wanted to maintain a healthy appearance to the world and more importantly, their investors. Motivated by said maintenance of appearances, they began communicating with each other and agreed to submit lower-than-usual borrowing rates to be calculated for the LIBOR. It is very similar to you lying about your salary on your CV, only without the butterfly effect of global repercussions.

After Barclays settled charges that it did in fact manipulate the LIBOR by submitting falsified numbers for years, the bank not only received a hefty penalty payment of more than $450 million, but also opened a financial can of worms, prompting suspicion and close investigation of other international banks that were suspected of similar illegal involvement. The regulator continues to probe the ‘extent’ of the other banks’ involvement in the illegal rigging to further determine the current status of the global financial market and what steps are needed for reform.

Institutional investors have been the most negatively affected by the LIBOR manipulation, according to 34% of the poll’s respondents, but, as regulators look for methods to curb falsification of the most vital of numbers, 70% say that even the LIBOR submission process should be closely regulated.

The findings of the survey are not only conclusive but very relevant to the GCC region as LIBOR is very frequently used as a benchmark comparison. “Libor as a reference rate is well entrenched in the GCC monetary system and is frequently used as a benchmark comparison to domestic reference rates like EIBOR for Emirates and SIBOR for Saudi Arabia. Any reforms in setting Libor will affect the cost of doing business in the GCC and hence should be of importance to both lenders and borrowers from the Middle East,” says Mr. Yacoub Nuseibeh, President of CFA Emirates.

The poll has revealed some strong opinions about oversight and regulation of the entire submission process and control of LIBOR rates, but the majority of respondents strongly voted for the regulator having the power to pursue criminal sanctions against violating banks. Whether the LIBOR will undergo a major reform or be entirely replaced by other market-based rates like REPO, is still for the moment, unclear.

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