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The proposed reform of LIBOR will still fail

Martin Wheatley, the head of the new proposed Financial Conduct Authority which is supposed to regulate and prevent wider issues of malfeasance in the City than the FSA was able (or rather, unable) to deal with, recently had this to say about the LIBOR (London Inter-bank Offered Rate) which acted as the benchmark for $300 trillions of derivatives across the international economy: “a broken system built on flawed incentives, incompetence and the pursuit of narrow interests that are to the detriment of markets, investors and ordinary peoploe”.

So who was responsible for running and monitoring it for the last 20 years? The British Bankers Association. And who manipulated it and abused it either to give a deliberately false impression of their stability post-crash or at a different point in the cycle to exaggerate it falsely to inflate their trading profits? The banks, notably Barclays, but also at least another 14 big global banks. The conflict of interest is blatant, but the system was allowed to run unhindered both by the Tories and New Labour for two decades. And which bank executives or traders have been prosecuted, convicted and jailed? None.

The deliberate laxity, the holding the telescope to the blind eye, represented by the ‘regulation lite’ culture of the decades of trhe neoliberal ascendancy is truly shameless. Grayling, the new hardline punitive Justice Secretary, makes clear his desire for tougher ant-crime measures and more robust use of imprisonment – but not for his Tory friends in the City. Prison is for the little people, featherbedding for the privileged elite.

Wheatley has at least proposed some sensible short-term measures to alleviate the most obvious defects in LIBOR. Instead of the present 150 or so currency and maturity combinations being used to compile a potentially spurious figure, only the 20 most traded and relied upon will be considered, which will certainly reduce the need for guesswork. The BBA is being forced out – only two decades too late – to be replaced by independent financial regulators. And submissions which are plainly false and manipulative will be subject to criminal liability.

Yet still there are weaknesses. The real underlying deficiency of LIBOR is not so much the rate-setting process, but rather the innate tanure of inter-bank lending. Using bilateral loans between banks in London as abenchmark for trillions of worldwide transactions is not a genuine market at all, but an offshoot from an opaque, inward-turning financial process that has more the flavour of cosy clubbiness than strict financial regulation. In addition to making inter-bank lending itself more transparent and genuinely market-based, derivatives (insofar as they are continued at all, under robust regulation) and other transactions sholuld be shifted to using wholly different benchmarks.

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