Wednesday, July 25, 2012

Regulation is not enough

After the crash of 2008, governments had to bail out their banks for having taken excessive risks. Some were too big to fail, let aside the exception of Lehman Brothers, the fourth largest US bank.  But in the aftermath of the crisis, they continued their business as usual activity.  Nouriel Roubini points out that" the incentives of the banks are still to cheat or to do things that are immoral and the only way to avoid that is to break-up this financial supermarket " 

The Barclay's  case is just another example of immoral behavior. Together with other European and US banks, they manipulated the Libor - the average (estimated) interest rate which serves as a benchmark for inter-bank and private transactions which represent today around 500 trillion dollars- as well as the Euribor, the equivalent for the euro area. The financial impact is quite significant: billions of profits for the banks, additional charges for businesses and citizens. 

How could these crimes happen ? Regulators were distracted, or complacent but did not ignore the fact. Bankers have disregarded basic financial rules without any effective control and supervision. Now, investigations are under way in the US and Europe which could eventually lead to arrest bank managers and traders. 'Class actions' (collective judiciary actions) have been launched against the banks, but these legal battles will probably take years.

The issue is whether there is any effective regulation which could stop banks from cheating on interest rates, building 'ponzi schemes' or laundering dirty money. There are no limits to their criminal fantasy. Global rules are necessary but they have to be enforced vigorously with severe sanctions. Leading by example is one way forward: powerful bankers who committed criminal acts should go to jail. We need to create the right incentives to reform the international financial system and put an end to Adam Smith's 'vile maxim of the masters of mankind" - "all for ourselves and nothing for other people". 

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  1. Barclay's, the main bank involved in the Libor scandal apologises and beats expectation with a profit of 4,2 bn £ before tax. It cut eurozone exposure and set aside 450 m £ to compensate small businesses for having sold interest rate hedging products. Nobody is really convinced about this move. The damage caused is much, much greater also to consumers on mortgages and loans- they should be compensated fairly as well.

  2. British high street giants Barclays, HSBC, Lloyds and RBC have been ordered to compensate firms hit by this mis-selling, and to stop marketing complicated ‘interest rate structured collars’ to retail customers. To know more about interest rate hedging Click here.