Bankers’ betrayal

The scandal emanating from Barclays Bank in England struck a chord in the memory of Caribbean peoples everywhere. Barclays, after all, had been the “Banker to the Caribbean” (then known as the Colonial Bank) going back to 1836 – smack in the middle of the emancipation of slavery. Caribbean peoples were being prepared for the transition from “slavery” to “consumerism”. With very good reasons, now even more apparent, some would say that the latter status was simply another type of the former.
By 2001 Barclays Bank PLC and Canadian Imperial Bank of Commerce (CIBC) had reached agreement to combine Caribbean operations to establish First Caribbean International Bank. While in 2006 Barclay’s interests were bought out by CIBC, we can be sure that – banking being driven by international connectivity – the ties have remained strong. So exactly what is this “LIBOR” scandal all about and how has it, or will it, affect us?
Very simply (and we will have to remember that nothing in the world of modern banking is actually simple) “LIBOR” – the London Interbank Offered Rate – is the reference rate for every conceivable credit-based transaction in the world. The LIBOR is fixed on a daily basis by the British Bankers’ Association. It is derived from a filtered average of the world’s most creditworthy banks’  interbank deposit rates for larger loans with maturities between overnight and one full year.
What the average layperson finds amazing about the LIBOR scandal is that its origin undermines the quintessence of what banks are supposed to represent: trust. The LIBOR was calculated daily by two men sitting in a small office in London after receiving the information on loan rates called in or e-mailed voluntarily by the participating banks. Everything operated on the honour system. Using the daily LIBOR, borrowers – from the small man-in-the-street to sovereign nations – would pay Libor-minus or -plus depending on where they stand in the credit hierarchy.
By under or over reporting interests rates, Barclays and several other banks, were thereby ‘gaming’ the system in their favour. But what is even more disturbing is that while Bob Diamond (CEO of Barclays who has since resigned) and the bank have been blamed for “lowballing” the rates at which Barclays said it could borrow from rivals at the height of the 2007-08 financial crisis, most insiders insist the authorities knew these rates were inaccurate but did not object at the time because of fears it could further destabilise panicked markets. A senior banker commented that “Regulators knew those rates were not the ones where banks were prepared to lend to each other. They had all the evidence.”
The ramifications and cost of the LIBOR manipulations may never be known. The essential question to answer is how would individual economies, such as say, Jamaica’s  — and the global economy — have fared if credit markets had cleared as a function of the supply of and demand for credit instead of the made-up numbers reported by the banks in the LIBOR-setting ring? One of the chief macroeconomic tools used by central bankers to stabilise their economies is to set interest rates through monetary policies. What was the cost of those monetary policies being undermined since the rates was totally disconnected from the real economy?
But it is important to identify what is behind this betrayal of public trust, so that if governments are serious, they can deal with the underlying causes rather than the overt symptoms. It all goes back to the incentive system in the banking system where the lines between traditional ‘deposit banking” and free-wheeling “investment banking” have been erased through deregulation. Banks’ employees earn massive bonuses from profits that are never ‘clawed back’ when there are losses. They have every incentive to game the system.
Profit making is then taken to its limits by the senior managers of banks. Why not? Diamond received 20 million pounds last year.