An Analysis of Libor Punishments
Abstract: The article describes the punishments meted out to offending banks. It argues the inadequacy of the punishments and suggests how the punishments could have been handled to send a much stronger and clearer message to the offenders. More robust punishments may prevent financial scandals like the Libor manipulations from happening again in the future.
Introduction
The Libor manipulations were a surprise to regulators. The scandal highlighted regulatory blind sight as manipulation of Libor was not an offence at the time it occurred and there were hardly any legal provisions to prevent such manipulations from taking place. The nature of the scandal was an assault on the culture of trust and good faith within the financial sector and it stirred international attention as it affected global transactions worth trillions of dollars. Subsequently, the regulators intervened and enforcement authorities started investigating the matter. After the initial uproar was over, all anticipated swift and appropriate justice from enforcement authorities. The enforcement system encountered two glaring problems in administering fit and proper justice. First, the authorities faced a scarcity of available legal recourse to deal with the abuse. Second, the banks involved were mostly globally systemically important banks that could not be punished without repercussions to the economy. These two factors contributed towards the banks receiving reduced penalties giving rise to the debate on the adequacy of the Libor punishments. In this article we discuss the nature of the punishments imposed on the implicated banks. We also discuss if the punishments were justified as compared to the gravity of the offence.
Nature of the abuse
It is important to understand at the outset that the manipulation of Libor was a continuous phenomenon in which a number of banks participated over different periods of time.
Different jurisdictions were affected and different authorities across these jurisdictions dealt with the banks in their own ways. It is also important to understand at this point Libor was not the only international interbank interest rate that was being manipulated. Investigations in Libor manipulation uncovered manipulation of Tokyo Inter Bank Offered Rate (Tibor) and the Euro Inter Bank offered Rate (Euribor) during the period.
At the European Union level the manipulation of Libor and Euribor was considered as an example of anti-competitive behaviour characterised by banks forming cartels to achieve commonly agreed anti-competitive objectives. In the U.K. it was seen as attempts to defraud the market. The authorities were however handicapped by insufficient laws to handle such manipulations. In the U.S the manipulations were illegal as they unlawfully affected the U.S derivatives market.
Aryaman Basu Aryaman works as a lawyer for the Competition Commission of India. He completed a Master of Laws degree, specializing in Banking and Finance Laws from Queen Mary, University of London. Aryaman earned a Bachelor of Laws degree from the National Law Institute University, India.
