In 2008 when financial turmoil erupted in the developed world over the sub-prime mortgage, a series of financial debacles including failure of some banks shook the United States. This financial crisis contaminated Europe and many other parts of the world which eventually led to the worst economic recession since great depression in 1930.
The situation was so severe that it went beyond the imagination of many governments including the US and the European Union (EU) which had to come up with rescue programmes that included billion dollar bail-out package. While watching the situation and undertaking various measures including promulgation of various rules and regulations viz, Dodd Frank Act for arresting further aggravation of the crisis, one after one financial irregularity surfaced and one of them was LIBOR manipulation.
LIBOR (London Inter-bank Offered Rate) is considered and accepted as benchmark rate by banks and financial institutions all over the world to determine pricing of various loans sanctioned. This benchmark rate setting is managed by the British Bankers' Association (BBA) and followed all over the world. Trillions of dollars disbursed in the form of student loans, mortgage loans, derivatives financing, inter-bank borrowing and commercial loans are priced using LIBOR set by the BBA. It was detected that during the period from 2006 to September 2010, rigging was done while setting LIBOR and as a result, entire loan pricing has posed serious questions. Many internationally-reputed large banks and financial institutions were allegedly involved with LIBOR manipulation. Barclays Bank, Royal Bank of Scotland, UBS, Deutsche Bank AG, Citigroup Financial, HSBC Holdings and JP Morgan Chase, known as internationally reputed huge financial institutions, were alleged to have been involved with Libor rigging. Initially, the financial regulator in the UK fined the guilty banks and financial institutions $ 9 billion and Deutsche Bank AG alone paid $ 2.5 billion. More than hundred traders and brokers were dismissed with 21 more charged with criminal offences.
Although manipulation in setting any rate is considered a serious financial crime, yet the alleged LIBOR rigging did not draw that serious attention from the concerned authorities including the regulators and the governments amid prolonged financial crisis sweeping the developed world. Initially, the US and the UK regulators were not found to be so active in investigating as to who were responsible for the financial offence. And their actions were merely confined to imposition of pecuniary penalty. However, public outcry created over this issue eventually compelled the regulators to move with investigation and legal proceedings. It took seven years to complete investigations and initiate legal actions.
The first trial of LIBOR manipulation will start in a British court this month. Thomas Hayes, who is alleged to have been the mastermind of rate setting manipulation, is the main accused in this trial. Hayes has, however, denied any wrongdoing in setting LIBOR. Even the BBA, which runs this benchmark rate setting operation, has not admitted any flaw in the system. Hayes, who was brought up in London, started his banking career joining UBS where he did the job of trading derivatives related to Japanese Yen. In 2006, he moved to Japan and established himself as an efficient trader. Even in the financial world, Hayes was known as a born trader with God-gifted talent and efficiency. In 2009, he was hired by Citigroup Financial with handsome compensation package including $ 3 million bonus.
There were also innumerable youngsters in the financial world who were involved in trading markets of currency, derivatives and commodity. They were all blue-eyed boys to leaders and executives of banks and financial institutions which hired them in their very small ages with huge financial remunerations and bonuses. Even prior to financial collapse in 2008, these youngsters used to ride private helicopters to move from one building to another building in New York for attending meetings and discussions with their counterparts or other groups. Their role and behaviour were so dominating in the institutions that all other departments including operation and audit were not only scared of but also submissive to them. The dire consequence of creating such influential group in the financial industry merely for making easy money was not good at all and the whole world realised it after the collapse of financial system and LIBOR manipulation in 2008. The golden era of those traders is now gone and many so-called smart traders are not only out of job but also facing legal cases in many American courts.
While investigating the allegation of LIBOR manipulation, the US Commodity Future Trading Commission, the US Department of Justice and the British market regulators detected a series of email communications, chat room and telephone conversations which evidenced that some brokers collaborated in tempering the LIBOR. Based on their findings and documents, the regulators sued them in the Crown Court of the UK where first of its trial is supposed to start this month. The trial is expected to last 10 weeks and afterwards, a verdict will be announced. However, final verdict may take some time to be enforced because the decision is likely to go to the superior or appeal court. If the allegation of LIBOR manipulation is proved, some borrowers, especially large corporate borrowers, who paid interest on their billion dollar loans, may come up with their logical demand of reimbursing excess interest paid for manipulated LIBOR. If one such incident happens, contagious impact will be there all over the world lodging claims and counter-claims of realising excess interest paid due to the LIBOR rigging. And if adjustment of excess interest paid or received is allowed, our country will not be immune from this impact.
The Bangladesh Bank (BB) and the commercial banks in our country which might have received interest at LIBOR on balance of their NOSTRO account (maintained with foreign banks) may have to reimburse the excess amount. At the same time, our banks might have paid interest at LIBOR rate on many international trades and the excess amount paid may be claimed for reimbursement from those banks. No one knows in which direction the aftermath of this trial will move. A good preparation will help the claiming and reimbursing banks to be in an advantageous position to manoeuvre the likely fallout.
It is apparent that the opportunity of adjusting interest, if it happens at all, will not last long. So only the banks having prior preparation will be able to avail this opportunity. Therefore, as a part of precautionary measures, our central bank and commercial banks should figure out how much interest at LIBOR they received or paid and keep the figure ready for submission if the situation warrants.
In our country's financial market, LIBOR is not used to determine applicable interest rate. However, call money rate is applied while borrowing takes place among banks. Even call money is the only and popular means of mobilising funds in order to meet short-term obligation of banks. This is a very popular practice in our banking system.
Banks frequently borrow from other banks and rate as agreed upon by lending and borrowing banks only for overnight is known as call money rate. Although this is a very popular and widely applied rate in the banking industry, yet how this rate is determined is not clear to many of us. No standard set procedure with some prior parameters and principles is used to determine call money rate. Usually the prevailing market condition based on demand for and supply of investible fund determines the call money rate. Banks holding excess funds remain in advantageous position to demand higher rate while banks requiring urgent funds for meeting their short-term obligations remain in disadvantageous position and pay higher rate. If the demand from banks is found to be so acute than the available fund held by other banks, the call money rate rises without any set limit. Such worst skyrocketing call money rate was experienced by the country's banking sector in 2004 and 2005 when call money rate climbed to abnormally high of 60/70 per cent. It is a common phenomenon just before two Eid festivals, year ending and on many occasions. When the demand for money to meet short-term obligation rises, the call money rate becomes very volatile and behaves abnormally registering high rate. However, the abnormally high call money rate has never been investigated to make sure whether there was any manipulation behind such abnormally high call money rate. The BB has expressed its concern and taken some corrective measures to cool down the rate but we have not heard that they have investigated this exorbitantly high call money rate.
In financial activity, any unusual incident will have to be probed in order to ensure fair practice but investigation of charging high call money rate is hardly carried out either by the BB or the Bankers' Association. Moreover, there is no set policy to determine and charge interest on call money borrowing. At the same time, this widely practiced borrowing facility should not be kept in free market. Rather it should be governed by some set policies and procedures.
Once upon a time, LIBOR setting was full of trust and confidence and nobody had imagined that there might be any flaw in the system of determining benchmark rate setting. In spite of having well-defined policies and procedures and being under stringent supervision, the rigging occurred in LIBOR setting. So the probability of questioning about the flaw in charging call money rate in our banking system cannot be ruled out and therefore time has come to make this inter-bank borrowing system more transparent. Some policies and procedures will have to be developed in order to govern the call money borrowing facility and the rate applied thereon. In this context, the BB has to play a pioneering role in formulating policy framework and making it binding for all commercial banks.
Unearthing LIBOR manipulation and subsequently imposing deterrent penalty by regulators and legal proceedings for trying this financial crime may be an eye-opener for our banking sector.
The writer is a banker based in Toronto, Canada.
nironjankumar_roy@yahoo.com
LIBOR manipulation—lessons for Bangladesh banks
Nironjan Roy | Published: June 07, 2015 00:00:00 | Updated: November 30, 2026 06:01:00
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