Friday, July 6, 2012

LIBOR and Fixing Rates

I doubt this story has passed anyone by; Barclays bank decided to attempt to manipulate a market through lying about the price it was paying. According to this article summarising the whole thing by Sloman, they may have succeeded. If it did, it would then have ended up giving a better impression about how "safe" the bank was at the height of the crisis, thus most likely avoiding as much of a share price fall, and as high rates to pay to borrow money from other banks (that's what the interbank market is for).

There's a lot that will come out in time about this, but the whole episode neatly fits within a module I teach each year in Birmingham called Contemporary Issues in the UK Economy.  We have a section on the financial crisis, and naturally by the time I get round to teaching it next (February 2013), I will certainly be talking about this crisis, and the likely proposed response to it.

What should be noted most importantly though is that is shows the limited information available to regulators. Surely the regulation that was already heading through parliament should have been sufficient to "prevent a repeat of the crisis ever happening again"? It won't take you an economics degree to be sceptical about that commonly expressed sentiment, but hopefully it will help you to be constructive about it.

Of course, what's being talked about is the regulation heading through parliament being amended - amended already, before it's even got through? Then we'll amend it again next time something emerges - the point is that government doesn't have all the necessary information to prevent everything happening, and hence will like this always be fighting the next war. They may legislate against some manner in which the rate was "fixed" - banks will continue to have an incentive to do this, and will just find other ways to do that.

Probably the most important point though is the general direction of response - our response has been "let's regulate more!", because the problem was "there wasn't enough regulation!". Yet nobody ever explains why the regulation pre-crisis wasn't enough, and why adding more to the mix will somehow solve the problem.

What would be a much simpler response, and probably more effective, would be to empower us as customers in a more fundamental way - offer us more choice. Allow more competition in the banking sector. Change competition policy such that we don't encourage market consolidation until there are dominant players like Barclays and RBS who can abuse their position and get away with it because there isn't any realistic alternative. Why is it that the only way a new bank could emerge from the crisis was by Virgin buying the carcass of an old one?

If we could vote with our feet (and it may require some regulation to enforce that to be allowed since we share a lot of information with our bank that other banks haven't got to make us better more suitable offers), then we'd walk away from banks like Barclays who do things like they've been found to be doing. Then the incentive for Barclays not to do illegal, immoral things is that they will suffer on the bottom line - the most important thing for them.

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