By David Jessop
Recent developments in Europe and North America, involving Barclays Bank and others in the manipulation of Libor rates, are truly shocking.
They bring into question not just the role of the banks concerned, but suggest that a once measured and conservative profession that people trusted, has in major financial centres become so self-seeking and lacking in morality that bankers at the highest levels are prepared to condone or order actions amounting to fraud on a global scale.
As this is being written the story is still unfolding.
In outline it is about falsifying the benchmark interest rate against which almost all global financial transactions take place. Libor –short for the daily London interbank offered rate - is the rate that establishes the costs to banks to borrow from each other and the figure against which almost all other rates are set for financial products and instruments ranging from swaps to complex derivatives, mortgages, personal savings and loans.
Around 20 major banks, in the US, Europe and Japan have received requests from their regulators to provide information on the setting of the Libor rate over a number of years, including at critical moments during the 2007-9 global banking crisis. The allegation is that these banks artificially lowered their Libor submissions to enhance their financial health.
Of these so far only Barclays has admitted that its traders and bankers did so and a fine of US$300m has been levied on it by UK and the US regulators.
But in an indication of quite how serious the consequent breakdown of trust is, the former British Chancellor of the Exchequer, Alistair Darling, has said that the Libor rate was one of the key indicators he used during the 2008 global banking crisis to assess the strength of banks, but that he now realised this was seriously flawed. “If you can’t trust banks on something as basic as this, what confidence can you have in them,” he told the London Financial Times.
Whether what is being revealed will result in legal actions against banks and individual bankers remains to be seen. However, the US Department of Justice is pursuing criminal and civil investigations and there is talk of class actions against the banks involved.
These are of course not just matters of concern to those who live in Europe or North America. In a global economy, banks operate across borders, Governments and institutions rely on them, and their role is as essential to the Caribbean’s financial systems as it is to the countries in which they are located.
For many who have lived or worked in the Anglophone Caribbean, the coupling of Barclays name with this scandal may seem unreal. Most remember Barclays Bank in the Caribbean, its network of offices and branches and the bank’s head office in London, as the repository of traditional values.
The bank of course gradually exited from the Caribbean. In 2001 after a 150 year presence, Barclays and CIBC announced that they were in discussions. This led to the combination of their retail, corporate and offshore operations in the region to create FirstCaribbean International Bank. Then in 2006 CIBC acquired Barclays’ stake, becoming the majority shareholder in FirstCaribbean
Although Barclays Caribbean ethos may now seem a little quaint, in many ways it has, together with the strong corporate culture of the Canadian banks in the region, resulted in the welcome if sometimes frustrating conservatism of Caribbean banking and its ability to remain more or less untouched by the crisis in the global banking system.
Notwithstanding, the regional financial system has been severely tested. Caricom Finance Ministers are still trying to work out how to respond on a regional basis to the multi-billion dollar failure in January 2009 of the Trinidad-based financial conglomerate, CLICO and its subsidiaries; and just three weeks ago a US judge sentenced Allen Stanford to 110 years in jail for his part in a US$7bn international fraud run out of Stanford International Bank Ltd in Antigua.
What has protected mainstream Caribbean banking is its limited integration with international financial markets. As a consequence it largely avoided exposure to the collapse of Lehman Brothers and others US financial institutions, did not buy mortgage backed securities, is not involved in high risk financial instruments like derivatives, has relatively low levels of overseas borrowings, has not confused wholesale and retail banking operations, and continues to have a clear commercial and social purpose.
Despite this there should be no room for complacency.
There remain worrying gaps in the ways in which financial institutions in the region are supervised and regulated. Economic and commercial linkages, common vulnerabilities, smallness and the danger of instability in the global financial system all suggest that there is pressing a need for a single set of rules supervised by a regional regulatory institution.
In an important speech in March that deserves much wider attention, Ewart Williams, the Governor of Trinidad’s Central Bank suggested a series of remedies. He argued for strengthened financial sector legislation that covers the banking system, insurance and the credit unions and a need to substantially upgrade and consolidate financial sector supervision. He also recommended all countries having national insurance schemes to cover deposits in banks to protect the less well off and for there to be national and regional crisis management plans. He made the point that financial sector legislation in the region is grossly deficient when compared to what obtains in advanced or emerging market countries and that there was a danger of regulatory arbitrage if legislation was not harmonised across the region.
Caricom Heads of government need to take more seriously the importance of what Governor Williams and other Central Bankers are saying, not least because of continuing global economic uncertainty. Unfortunately the absence of effective regional governance through Caricom may set aside or delay implementing many of these important, stabilising and common sense approaches.
What is now happening in North America and Europe suggests that avarice, the corrosive sense that big banks are above the law and will always be bailed out, and the continuing crisis in the Eurozone, could return to threaten the global economy .If unchecked there is a danger of social instability not least because these forces cast governments and social policies aside and leave ordinary people feeling helpless and marginalised. If there is another crisis, this time the Caribbean, now economically less robust, may not be immune.
David Jessop is the Director of the Caribbean Council and can be contacted at email@example.com
Previous columns can be found at www.caribbean-council.org