The Libor rate scandal that has forced the exit of the top leadership at Barclays, the UK banking giant, over allegations of its rates being deliberately rigged goes beyond the issue of internal accommodation among its swaps traders and treasury managers. It strikes at the heart of the integrity of the global financial system built on self-regulation by mature market players and a range of benchmark rates or indices that form the basis for pricing of loans, securities and derivatives transacted worldwide. One such widely accepted and closely tracked standard is the London Interbank Offered Rate, or Libor – the average rate at which banks say they expect to be able to borrow from one other for tenors ranging from overnight to 12 months. The Libor, calculated everyday based on submissions from a panel of 16 major London banks, is used to set rates for borrowings and securities contracts currently worth over $ 800 trillion. Even external commercial borrowings by Indian corporates and the regulations relating to these are pegged to this rate. The existing norms, for instance, bar firms from contracting loans of up to five years’ maturity at rates more than 3.5 percentage points over the six-month Libor.
Against this background, it is no small matter that derivative traders employed with Barclays in New York and London were found to have ‘requested’ those manning the money market desk at the bank’s headquarters to make Libor submissions favouring their specific investment positions. These requests, having no link to the actual cost of the bank’s borrowings and meant primarily to maximise profits or minimise losses of its own traders’ derivative transactions tied to the Libor, were made particularly during the 2007-08 period, when liquidity conditions were tight. Since such attempts at deception suited both the traders (whose compensation was partly linked to the profits or losses in their trading books) as well as the bank (since lower rate submissions made its financial position appear stronger), they were willingly acceded to, ostensibly with the full knowledge of Barclays’ top management. Moreover, Barclays was apparently not alone here: There are a dozen or so other global banks under investigation by British and US regulators for manipulating the Libor.
Libor being amenable to fixing is as serious as the erosion of trust in the world’s big credit rating agencies following the 2008 economic crisis. But given that Indian companies would continue to borrow abroad at Libor-linked rates, just as our markets are bound to react to any Standard & Poor’s or Moody’s downgrades, one cannot ignore them either. All the more reason, then, for emerging market economies to work towards creating alternative benchmarks and rating bodies relevant to their specific developmental and financial requirements. The current crisis of credibility faced by Western financial institutions – besides the likes of the International Monetary Fund having to dip increasingly into the resources of China, India or Brazil – perhaps presents an opportune moment for that.