Bolstering public trust in banks is once again on the agenda following the Libor inter-bank rates scandal now spreading in the Western banking industry. When will banks that are too big to fail ever learn?
A prime banking failure from the drying up of credit, after balance sheets were gutted on reckless bets, was exposed as a result of the derivatives fiasco of 2008. Companies were left stranded. Joblessness rose, asset values fell. Trust in banks hit the depths. It raised this poser: Of what use was a globalized financial system if it could not do a proper job of financing trade, business expansion and daily commerce?
Only after government bailouts in the United States and Europe and stimulus lending in China did the wheels start turning again.
The Libor revelations differ only in that impaired balance sheets are not a factor, although implicated banks are staring at provisions which could reach many billions when fines and lawsuits are disposed of. But the same frailty is revealed: A lack of trust arising from the opacity in which the biggest names in finance operate in setting the daily Libor and companion rates, and the smugness evinced.
To be credible, a process by which a cabal of banks in London submits rates for mutual lending has to be transparent and supported by verifiable data, as trillions of dollars in transactions in much of the globe are pegged to it. It is neither. Disclosures speak of an astonishing degree of arbitrariness and traders’ mateship in the daily ritual behind the scenes.
The regulatory authorities in North America, Europe and Japan ought to investigate the matter thoroughly and make the rates setting tamper-proof. Credit lines depend on confidence.
The British government is proposing going a step further, to change the culture of banking as it is practised in London. This is refreshing. Britain has been stung more than most as Barclays, a British bank, has been the only institution so far to have been fined over the rates manipulation.
If the rigging among banks has been going on for nearly a decade, as alleged, the rot runs deep. The fact that some 20 big banks are cooperating in probes is troubling.
After this expose of self-gratification, there will be temptation anew to demonize the entire banking industry as immoral. There is sufficient cause: Generous bonuses paid out of bailout money, banks’ tax avoidance and a readiness to resort to tricks to game the system. Where rules have been breached, punishment should be swift. Beyond that, it is more constructive for all to work towards restoring faith in an institution the modern world depends on.
Banks work only when depositors and other users have confidence in them. Now, they will have to earn it all over again.
(The Straits Times)
(Asia News Network)
