The Libor Scandal won Ethical Prize

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Canary Wharf (Photo credit: Wikipedia)

When the LIBOR rate rigging scandal was announced, the British Bankers’ Association (BBA) cultural practices were hoist into the limelight. How had corruption come to prevail over ethical business practice in the banking sector? We get the answer. The Robin Cosgrove Prize has just awarded to ” Lessons from Libor (benchmark interbank lending rate): moving beyond compliance to explore the dynamics of ethics within banks”.

Fact: The LIBOR scandal

The London Interbank Offered Rate or LIBOR is the mean average or other percentage rate that banks use to borrow from other banks. In the latter case, definition of the rate depends on the bank, currency and total LIBOR rate submission. It is estimated that more than USD $350 trillion worth of contracts (i.e. derivatives, student loans, etc.) globally are part of the LIBOR rating index.

The submission of rates by 10 banks daily, at 11 a.m., valued ten currency rates, and lending rates. The 3 month dollar LIBOR, the key rate for U.S. borrowing between institutions, was part of the rate publication. The full listing of LIBOR included the average of all rates, post elimination of the top and bottom quartiles. This practice made it easy for banks to manipulate those estimates.

Collusion by traders at major UK institutions in the submission of false rate estimates enabled skewing of final figures, so that all transactions benefitted their books. LIBOR was critical to this activity, in that forward-interest rate swapping might be balanced by a gamble on the LIBOR rating against fixed rate contracts.

LIBOR manipulation increased bank profits and professional concessions. Speculative issues surrounding reputation of some financial institutions also foreshadowed rate manipulation. Submission of lower rates by Barclays’ is said to have been a move to improve confidence in the institution’s access to credit.

According to analysts, there is still no conclusive evidence proving if manipulation of the LIBOR actually affected published rates. UK courts concluded, however that such activity was taking place.

Risk Culture: Reciprocity v. Virtue Ethics 

Institutional collusion is said to be the source of LIBOR scandal misconduct, pointing to the fact that not all established relationships result in ethical outcomes. Strong principles of relationship management in the financial sector set the stage for excessive reciprocity leading to poor decision making on behalf of bank managers involved in illegal rate adjustment.

The cultural practice of excessive reciprocity is an ethical problem once it prevails over ethical decision making. The LIBOR scandal is in its very essence the result of this type of practice. Acquiesce turned into high levels of institutional risk, threatening the global banking system.

Virtue ethics theory, dating to Ancient Greek Philosophy in Aristotle’s ethical expiation of what ought to be sustained by custom elevates ‘role of community’ as the site of fruitful common good. The presence of a ‘conducive infrastructure’ as vital mechanism in the promotion of customary law is central to a Philosophy of virtue ethics in the contemporary moment. Transgressions induce danger. Risk is imminent when the line separating firm- or industry-level mistake is not construed as individual liability.

Ongoing circumstances where transgressions are not cited as individual violation of trust, and otherwise attributed to the organization, tend to distort the scenario for far longer than if personal liability were to come to the fore. Precisely to what extent bank senior managers involved in the LIBOR scandal had insight into the risks being taken remains, at least in legal fact, a matter of conjecture.

Still, financial industry leaders are faced with the paradox: how to create the proper conditions for a ‘gold standard’ in ethical value. The tendency of common law nations is to substantiate ethical beliefs with law, and vice-versa, to measure legal precepts through adoption of Western ethics.

Beyond Regulation: Bank Driven Change

Since the scandal, the aftermath has promulgated new regulation fining institutions heavily for misconduct. A total of $2.6 billion in damages charged to Barclays, UBS and RBS is the result of LIBOR violations. The UK Government’s Serious Fraud Office (SFO) is amid a criminal investigation of LIBOR manipulation. British Prime Minister Cameron is leading parliamentary review of the banking sector, with the aim of reinstating the UK as the most transparent regulatory oversight of major institutions in the financial sector.

The response by the UK Government in the wake of the LIBOR scandals evidences the critical nature of ethical decision-making in leadership in the financial sector. While values are most precisely aimed at individual conduct by senior management in large institutions, reforms are said to be focused on more general transformation of corporate financial sector culture. Bank driven change in task force review of areas where compromising ethical integrity for the sake of greater profit, and implementation of those risks, is still under review.

The LIBOR scandal opened up a general discussion about reciprocity in and between institutions, and the role of individuals in support of unethical practices. The UK Government’s Financial Services Authority (FSA) was split into two separate oversight administration: Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) in an effort to control abuse such as rate manipulation.

For more on this topic:
Joshi, P. Lessons from LIBOR: moving beyond compliance to explore the dynamics of ethics in banks.Ethics in Finance, Robin Cosgrove Prize Global edition 2012-2013.


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