Heritage Foundation’s David John: No new laws necessary to fix Libor problem

David John

David John, a senior research fellow in retirement security and financial institutions at the Heritage Foundation, said that new laws are unnecessary and would not improve the outcome in the recent scandal involving Libor manipulation.

Libor — or the London interbank offered rate — is a key benchmark used for interest rates on financial products around the world, representing the estimated average rate at which certain large London-based banks would be able to borrow from other banks.

At 11 a.m. each business day in the U.K., the British Bankers’ Association polls the 18 banks that participate in Libor for their estimated rates. The highest and lowest four for each maturity and currency are thrown out, and the middle estimates are averaged and used to calculate the daily Libor rate.

As in the recent Libor scandal, by submitting very high or very low estimates, traders seek to edge out certain submissions used in the Libor calculation, thereby moving the index up or down by hundredths of a percent. Though miniscule, this change could put a competitor out of business or create profitability in a derivatives transaction.

In the recent scandal, however, Barclays and other large international institutions found that concerns related to the health of the financial institutions led them to pay higher interest rates to borrow from other institutions. As a result, Barclays submitted artificially low interest rates to dispel concerns about the bank’s health.

Following the scandal, documents surfaced that revealed U.S. regulators knew of Libor manipulation long before the scandal became public, though they did not take action against the offending parties. Regulators in Europe and the U.S. called for tougher financial regulations and penalties. John argues, however, that “the system worked” and that no new laws are necessary.

“While regulatory delay in both the U.S. and the U.K. prolonged a resolution to the manipulation, the massive fines paid by Barclays and the anticipated fines that other banks face show that the manipulation is already considered an illegal act,” John said. “When individual officials and bankers are indicted, it will be clear that such actions are also criminal offenses.”

John said that rather than create new laws, the enforcement of existing laws is the more practical solution.

“The Libor manipulation is a serious crime that should have been detected and punished sooner,” John said. “What is necessary is for regulators to enforce existing law. They already have all of the tools that they need; they just need to use them.”

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