EU to make Libor fixing illegal

In characteristic on-the-pulse fashion, the European Commission is wading into the rate-fixing scandal with a nice, juicy piece of legislation.

by Michael Northcott
Last Updated: 19 Aug 2013

In this latest episode, the EC has proposed making rate-fixing illegal to stop a repeat of the Libor scandal. Of course, Libor is the rate at which banks lend to each other commercially, and the scandal came about because some traders at Barclays were trying to manipulate it and artificially improve their own trading position. The top brass at Barclays have had to resign because of the public outcry the scandal caused.

The EU’s Justice Commissioner Viviane Reding said in a statement that public confidence ‘has taken a nosedive’ thanks to the scandal, and concludes robustly that ‘EU action is needed to put an end to criminal activity in the banking sector.’ Whether EU action is ever ‘needed’ for anything, and whether it could possibly ‘end criminality’ in the banking sector, are surely points up for debate, but Reding certainly thinks this is the way to do it.

Unfortunately for the Brussels crew, Libor is only one indicator amongst hundreds against which banks can measure themselves and construct trading systems. Criminalising rate-fixing will probably only mean that banks select some other measure and start using that as their benchmark. But this is where the European Commission has been clever. One of its proposals includes introducing a directive which would establish exactly what a ‘benchmark’ is, and criminalise any manipulating of any benchmarks, as well as insider trading based on knowledge of those benchmarks’ status. Complicated and abstract stuff to the man on the street, but the basic idea is that bankers would not be able to legally manipulate any metrics for here on in, thus eradicating the type of financial instruments from which Libor was able to spring.

We reckon there’s still a lot more to come in the rate-fixing scandal – it’s only Barclays executives that have so far had to face any kind of public scrutiny, and goodness knows Barclays was not the only bank at it. We just wonder whether more one-size-fits-all legislation from Brussels can really be the best thing for it… 

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