On any given day, a bank may have either a surplus or a deficiency of cash. When this occurs, banks tend to lend to and borrow from other banks at a negotiated rate of interest. These interbank loans could be as short as one day and as long as several months.

The interest rate charged on these interbank loans is estimated by various banks and averaged every day by the British Banking Association (BBA) to create a benchmark interest rate called LIBOR.

Eighteen of the world’s largest banks submit information about their borrowing costs. The BBA then determines the LIBOR rates based on those submissions.

LIBOR in turn is used as a benchmark rate to price more than \($800\) trillion of securities and loans around the word, including swaps, derivatives, mortgages, and corporate and consumer loans. In September 2012, the United Kingdom’s Financial Securities Authority (FSA) announced that the BBA would no longer be administering LIBOR because of a scandal. This LIBOR scandal has had a significant impact on several banks.

Barclays Bank In June 2012, Barclays Bank PLC admitted to wrongdoing and was fined £290 million

(\($453\) million) for artificially manipulating the LIBOR rate from 2005 to 2009. The bank paid £59.5 million to the FSA, £102 million to the U.S. Department of Justice, and £128 million to the Commodity Futures Trading Commission. The next month, Marcus Agius, chairman of the bank; Robert Diamond, CEO; and Jerry del Missier, COO, all resigned. Diamond agreed to forgo his £20 million bonus for 2012, but he was still entitled to his £2 million pension.

Barclays admitted that it reported artificially high (or low) borrowing costs when it wanted the LIBOR rate to be high (or low).

For example, in 2007, it made submissions indicating high borrowing costs, while in 2008, during the credit crisis, the bank began to underreport its costs of borrowing.

Part of the reason for these incorrect submissions was to create the false impression that the bank was financially healthier than it really was. In October 2008, the Royal Bank of Scotland and Lloyds Banking Group were partially nationalized through bailout money provided by the U.K. government.

There was widespread concern at Barclays that it would be next. The bank wanted to indicate that it was financially viable to forestall a government takeover.

During this period, there was media speculation concerning the true position of the bank, although a Barclays compliance officer assured the BBA that its submissions were “within a reasonable range.”

There was also widespread concern that LIBOR was being manipulated..........

Questions:-

1. Which groups were most at fault for the LIBOR manipulations: brokers, traders, bank executives, bank boards of directors, or regulators? Why?
2. What should the regulatory bodies do with the fines paid by these banks?
Reduce tax rates for the general public?
Use the funds to reeducate investment bankers?
3. Robert Diamond continues to receive his £2 million pension annually.
Should he suffer financially by having to forfeit this pension because the LIBOR scandal occurred while he was CEO of Barclays?
4. Both Barclays and UBS reduced the bonuses of current employees to help pay part of the fines that occurred because of the actions of former employees. Is this fair?
5. The rate manipulations seemed to be systemic to the industry because so many banks were involved. What can be done to curtail such widespread unethical practices within an industry?
6. Why weren’t the directors of the banks that had caused the scandal fined or jailed? Should they have been?
7. Why should members of the public trust the banks that were involved in manipulating the LIBOR rate?