LIBOR - who benefited?

LIBOR (London Inter-Bank Offered Rate) has existed for more than 30 years as a means for banks to set the reference rate of interest for variable rate loans such as syndicated loans to national and local governments, international bodies and major corporations.  In the 1970s, the reference panel comprised five banks.  The fixing was made at a set time each day, the top and bottom rates were disregarded and an average was calculated based on the remaining three, to set for example the three month rate for sterling loans.  Rates such as EURIBOR were set in a similar way. 

Today, the Sterling LIBOR reference panel has 16 banks, and the daily submissions are made to Thompson Reuters, which manages the process on behalf of the British Bankers' Association (BBA). 

The top four and bottom four rates are disregarded at each fixing.  So this means, even when its rate submissions were manipulated, that Barclays would have been in the disregarded eight unless at least four other banks were wider from the average than they were.  Barclays submissions would have no effect when they're outside the central zone, and therefore any manipulation that had a material impact must have been minuscule.

Here are the members of the Sterling panel, as shown on the BBA LIBOR site

Abbey National plc	JP Morgan Chase
Bank of Tokyo-Mitsubishi UFJ Ltd	Lloyds Banking Group
Barclays Bank plc	Mizuho Corporate Bank
BNP Paribas	Rabobank
Citibank NA	Royal Bank of Canada
Credit Agricole CIB	The Royal Bank of Scotland Group
Deutsche Bank AG	Société Générale
HSBC	UBS AG

Two reasons have emerged for manipulations: one is to enhance trading books, and improve reported profits for the traders involved; the other is to improve a bank's standing as reflected by apparent cost of funding. There are reports that this latter manipulation was encouraged by HM Treasury and possibly the Bank of England. 

Every bank has sophisticated systems to manage its interest rate risks.  They assemble live data from the bank's trading systems and should be used to derive the rate submissions for LIBOR. 

The Parliamentary Inquiry (if that's what happens) can demand a full history from each of the panel members and find out the exact nature of the attempted rate manipulation, the difference between actual and submitted rates, and find from the BBA whether the manipulated rate was included in the day's calculation.  Each bank should be able to identify its profit or loss from a successful manipulation, and any individuals that profited personally from manipulating rates.

We live in interesting times, and with good management and some careful legislative change, this scandal can be used to improve processes and accountability in the banking market.

No to 'Outbound telesales'

At home, we seem to suffering a new spate of unsolicited sales calls - spam telephony, if you like (or don't). Even though both of the numbers are registered with the Telephone Preference Service (http://www.tpsonline.org.uk), the companies that are doing this just don't care. They're calling on what are clearly long distance circuits, with pre-dialling (sometimes several seconds delay after you answer before a human voice comes on the phone), and connect you to someone with a distinctly non-British accent, who doesn't know who they're really trying to contact.

This can be dangerous. Even when the caller identifies the name of the company she or he represents, there's no way to know whether or not this is for real. Someone called me today, she said, on behalf of a company whose services I've used for years. But she got the number of years wrong, and that says to me that she was doing the telephone equivalent of phishing.

I don't want to give any details to an unknown caller to enable them to offer me 'advice'. Nor do I do want to invite a high-pressure salesman into my home just because they happen to have 'someone in the area' next week; what area, planet Earth?

Telephone companies are bothersome at best when they phone to try and sell something. When they ask you at the end of a 20 minute call, "by the way, the contract is for 18 months, is that all right?", that doesn't feel like trustworthy practice. When you say, "I'd like to see the offer in writing", and they say it's only available today over the phone, is that a strong reason buy anyway? And if they send the key details, and they're in grey 4-point on the back of the brochure, is someone trying to hide something?

Frankly, I can find the products I want using Google, a newspaper, or even a flyer through the post. And then visit the website or make the call to Inbound Telesales, knowing who I'm calling, to do the deal. That's exactly what I did regarding buildings and contents insurance recently. Outbound Telesales is only for things you don't really want. Be brave - don't tick the box allowing them to contact you.

Idea: don't tax deposits or transactions, tax risk

While the Obama proposals to limit banking activities and the resulting restructuring of the banking industry are great news for management consultants and IT specialists like me, I can't help feeling that there's a simpler way to crack this one. Ideas like a Tobin tax, locally or internationally, could mess up trade and financial flows.

Levies based on the size of an institution's deposits, such as the HM Treasury's UK Deposit Protection Scheme, are plainly unfair. This scheme penalises the good rather than deterring the bad. Building societies and retail-focused banks have a large depositor base - and funding operations with a large depositor base is a lower risk affair than relying on wholesale funding as Northern Rock did. Building societies lend against physical assets which in theory should represent properly-valued collateral, which is a whole lot less risky than risking your capital in financial operations.

Banks have spent billions over the last five or six years on technology to calculate and assess risk. It's called Basel II. It has holes that the scruffier end of the market could climb through, but so does any set of rules. Despite that, some banks are really quite good at assessing risk, others less so.

Instead of taxing deposits or transactions, we should tax risk. This can be done at different rates depending on the type and the term of the risk, it would be priced into transactions and deter the sillier types of trade, and it would give a huge incentive both to the institutions and to the tax men to assess the risks properly to avoid underpaid or overpaid tax.

That's my opinion. Comment welcome.