Strike Three in Libor Scandal – RBS Fined for Rate-Rigging
The foul stench of the Libor scandal lingers on. This week, Royal Bank of Scotland (RBS) became the third bank to settle with authorities over its involvement in the rate-manipulation affair, paying a combined total of £390 million (approximately $610 million) to the U.S. Commodity Futures Trading Commission, U.S. Department of Justice, and U.K. Financial Services Authority.
A new twist in this saga is the allegation that the setting of the rate in Tokyo (Tibor) involved banks colluding to fix the benchmark artificially higher in order to boost profits from mortgage products sold to households. This allegation is particularly troublesome as it is the first suggestion that rate manipulation carried a specific and explicit intent to profit from the expense of ordinary consumers.
A novelty with the RBS settlement is the revelation that regulatory fines will be paid out of the bank’s bonus pool. Part of the fines will be funded via claw-backs from deferred bonuses awarded in earlier years. This is a small mercy for U.K. taxpayers who own 82% of RBS; anything else would have been political suicide, such is the opprobrium.
A glimmer of hope lies among the initiatives that are underway globally to repair the weaknesses with interest rate benchmarks. Measures aimed at fixing the Libor process include giving regulators formal jurisdiction over rate submissions and criminal sanctioning powers, strengthened accountability and governance on the part of the administrators of interest rate benchmarks, and greater transparency over benchmark inputs, such as by corroborating rate submissions with actual transaction data.
As we’ve noted before, these steps are firmly welcomed. But with several more banks either implicated or still under investigation, public and investor trust will not be restored with the mere promise of stronger regulation in the future. In the short term, authorities must get rid of the stench by concluding their investigations as quickly as possible. Only then will the air clear, allowing the healing process to begin.
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