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libor and the treasury select committee: next steps July 11, 2012

Posted by Bradley in : financial regulation , add a comment

Next Monday the Committee will hear from Jerry del Missier, Adair Turner, Andrew Bailey and Tracey McDermott.

financial services lobbying July 10, 2012

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The Bureau of Investigative Journalism has published a number of articles about lobbying in the financial services context including this one about the FSA’s meetings with trade groups (and here’s the link to the story at the Guardian) which refers to minutes of meetings (which I would love to see). But of course these meetings happened in a context where politicians were telling regulators not to over-regulate, and not to gold-plate EU measures. The directive not to over-regulate came from the same place as Agius’ comments about the competitive international context in which Barclays operates, and trade associations have been dedicating huge amounts of effort for years not just to meeting with politicians and regulators but to developing sophisticated rhetorical and even theoretical arguments to support what they want from regulation. I remember one announcement for an FSA conference which explicitly stated that it would provide an opportunity for regulated firms to interact with their regulator. And, in December 2008 I asked:

whether it is really possible to have effective representation of consumer interests in a structure where the consumer representation is funded by a regulator which is committed to not frightening regulated firms too badly.

On some issues we seem to have moved on a bit from this point. But as to the larger question of how we develop policy in an environment with appropriate levels of scepticism about the arguments financial firms make about regulation, I am not at all sure. And by appropriate levels here I am concerned not only with the risk that regulation may be too lax but also that sometimes it may be too restrictive.

treasury select committee: libor hearings July 10, 2012

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The Committee published letters between the FSA and Barclays which have been the subject of discussion during Marcus Agius and the Committee today. Adair Turner expressed the FSA’s displeasure in April 2012 with Barclays’ behaviour. He wrote:

it is of course acceptable for a bank to argue for a favourable approach on any one specific issue, even if the regulator does not immediately agree. But the cumulative effect of the examples set out above has been to leave us with an impression that Barclays has a tendency continually to seek advantage from complex structures or favourable regulatory interpretations. These concerns are sufficiently great that I felt it was appropriate to communicate them directly to you, and to urge you and the Board to encourage a tone of full co-operation and transparency between all levels of your Executive and the FSA.

When questioned about this, Agius says that the job of a regulated firm is to act absolutely within the regulations but that they also operate within an extraordinarily competitive international industry and, within the constraints of regulation and law, their job is to do the best they can for their stakeholders. Earlier he commented that when a bank deals with its regulator it isn’t like dealing with a speed cop about driving over 30 mph in a 30 mph zone – it’s more complex than that.

The Committee spent a lot of time on the question whether Diamond misled them last week – before these letters were made available – about how the FSA characterized Barclays’ attitude to regulatory compliance in early 2012. The Committee focuses on Turner’s letter as representing the FSA’s attitude and Agius tries to argue that Diamond had been referring to Andrew Bailey’s earlier visit to the Barclays Board. Given the wording of the April 12th letter it’s difficult to understand how Agius thinks he can succeed in soft pedaling what was going on. In response to a characterization of the April 12th letter as “damning”, Agius says it is a “firm” letter from a regulator.

Members of the committee expressed surprise that Barclays does not record Board meetings (an intriguing idea for corporate governance reform, but surely unlikely to be adopted), and about the number of things Agius claimed not to know about. At one point he reminded the committee of the limited role of a Board. He resisted attempts to get him to express views on what Diamond was doing last week, or at various points during his tenure at Barclays.

For “a formidable financier with an eye for detail” I did not find Agius’ performance to be impressive. On the other hand he did spend quite a bit of time in the hot seat without saying very much (apart from the fact that King sought Diamond’s resignation and about how much Diamond will take when he walks away) and perhaps that was the point. But he didn’t give a very good impression of the state of UK banking.

more libor, more questions about financial regulation July 9, 2012

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Paul Tucker spoke to the Treasury Select Committee this afternoon, denying that the Bank of England had any responsibility with respect to Libor or the BBA, commenting on how difficult things were during the financial crisis, and expressing support for a twin peaks system of financial regulation. Of course these hearings are happening at a time when the UK Parliament is addressing issues of financial regulation with a Financial Services Bill in progress and a Banking Bill to come. Some of the personnel involved in regulation will continue to be involved in the new regimes, so those people have an interest in influencing how the changes are made. And one issue is how much enforcement power the regulators have. Members of the committee noted that the Barclays settlement resulted in significant part from the efforts of the US agencies involved. Regulators often want to blame problems on other jurisdictions. For example, giving evidence on swaps to the House Financial Services Committee Gary Gensler of the CFTC said last month (with a number of specific examples of harm caused to the US by actions outside the US in other regulators’ jurisdictions):

Balanced implementation of regulatory reform requires an acknowledgment that the activities of financial institutions engaging in transactions or setting up operations abroad can pose a profound threat to U.S. taxpayers and the economy.

Was it convenient for the CFTC/DOJ that the first bank to settle over Libor was not a US bank? Citigroup and JP Morgan are among the targets of investigators.

Michel Barnier has also commented on the Libor problem:

L’actualité le démontre avec l’affaire Barclays et la manipulation du taux de refinancement des banques, les comportements scandaleux restent possibles sur les marchés financiers. Les travaux sont en cours au sein de votre Commission pour renforcer la lutte contre les manipulations de marché et sanctionner les abus… Je considère que nous devrons sans doute renforcer ces textes pour couvrir plus directement de telles manipulations.

serious frauds office to investigate libor July 6, 2012

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Here is the SFO press release. Here is the link to yesterday’s House of Commons debate on professional standards in banking. Reading the debate isn’t very edifying. Much more attention seems to be focused on finding ways to blame the last government for failures in regulation than on how to regulate better for the future. And it is mind-blowing to see the Chancellor blaming what has happened on failures of regulation when before the financial crisis Conservatives were even more vocal than the last Labour Government about how regulation shouldn’t interfere with the ability of UK banks and the City to compete with banks based in other jurisdictions and other financial centres.

smart regulation consultation July 5, 2012

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The Commission asks some useful questions in its consultation on smart regulation (deadline for comments is September 21). For example:

13. Stakeholders should be consulted on the right issues and in the right ways. From your experience: (i) Are you generally consulted on all relevant elements of impact assessment (i.e. problem definition, objectives, policy options and their impacts)? (ii) Are consultation documents clear and complete? (iii) Is the mix of targeted and open consultations used by the Commission appropriate? If not, could you explain why and provide specific examples? …
14. Early consultation has the greatest potential to influence policy reflections but suffers from the lack of well-defined policy ideas. Conversely, when policy reflections are advanced, stakeholders can be consulted on the specificities of a proposal but may be unable to exert much influence on its overall need and design. From your experience: (i) Do Roadmaps facilitate your involvement? What use do you make of them? (ii) Are your views usually sought at the right moments in the process of policy formulation? (iii) Should open consultations preferably take place in one go or in separate stages? In the latter case, how could excessive costs (for the public and the Commission) be avoided and minimum standards respected?…
15. How do you generally become aware of consultations? Are you satisfied with this? If not, how would you like to learn about upcoming or current consultations?
16. Reaching all affected stakeholders and facilitating high-quality input is essential for ensuring the benefits of consultations: (i) How do you think the coverage of Commission consultation could be further extended in a cost-effective manner? (ii) How could consultation channels in Member States be mobilised to this end? (iii) Can the use of internet-based applications be improved?
17. What is your experience with consultations targeted to specific stakeholders (including public hearings)?
18. Are you aware of any good practices in the Member States or elsewhere on how to assess the representativeness of different respondents to a public consultation?…
19. The Commission provides information on the results of public consultation and their impact on policy choices in its public summary of the consultation, in impact assessment reports and in the explanatory memorandum accompanying final initiatives. (i) Are you satisfied with the quality and transparency of this information? (ii) As a participating stakeholder, would you want to be automatically alerted to the publication of these documents?…
20. Do you think current consultation practices ensure the effective and transparent participation of all relevant stakeholders? Do they lead to improved policy-making?

gao notes defects in outreach to borrowers with respect to foreclosure review July 5, 2012

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The GAO reports defects in the Independent Foreclosure Review:

Readability tests found the initial outreach letter, request-for-review form, and website to be written above the average reading level of the U.S. population, indicating that they may be too complex to be widely understood. Regulatory staff noted limitations to such readability tests and told us they discussed using plain language, but that the use of some complex mortgage and legal terms was necessary for accuracy and precision. Clear language on the independent foreclosure review website is particularly important as current outreach encourages borrowers to submit requests for review online. Communication materials developed by mortgage servicers with input from regulators and consultants included information about the purpose, scope, and process for the foreclosure review and noted that borrowers may be eligible for compensation. However, the materials do not provide specific information about remediation-an important feature to encourage responses as suggested by best practices and reflected in notification examples GAO reviewed. Without informing borrowers what type of remediation they may receive, borrowers may not be motivated to participate.

libor: politics and financial regulation July 5, 2012

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Bob Diamond appeared before the Treasury Select Committee yesterday to discuss Libor. On one level the reviews in Parliament and at the FSA are supposed to be about working out how to ensure this particular problem doesn’t recur. And the options on the table seem to be very focused on Libor. Should the regulators require that Libor be based on transactions rather than on opinions, should setting Libor be a regulated activity etc. We have seen some hints that the issue is seen as part of a larger issue – the banking culture issue – but that is both more significant and harder to find a regulatory fix for.

There’s another larger issue here. Financial stability concerns make regulators focus on systemically important financial institutions (for example this recent Basel Committee Consultation on domestic systemically important banks). But what about trying to identify the point at which practices become systemically important? Some years ago, when Libor was a bespoke rate fixed by mechanisms specified in individual transaction documents it wasn’t one rate that all could use. According to the BBA’s website, banks asked it to work on providing uniformity:

The BBA was asked by the banks it represents to bring a measure of uniformity into the market and to devise a benchmark to act as a reference for these new instruments. Rather than negotiating the underlying rate or forming rates by taking averages of ad-hoc panels, banks could now use a standard rate. This facilitated the operation of markets and made benchmarking more transparent and objective.

The standardization of Libor increased its use as a rate of interest across a range of transactions around the world. But standardization may be a source of systemic risk if it makes particular behaviours more pervasive. We know that the way in which securitizations were structured involved invisible systemic risks. We are dealing with issues around the regulation of derivatives. But all of these issues are linked by standardization of financial transactions and practices.

Then there’s the politics. Did the Government or Bank of England encourage banks to manipulate Libor during the financial crisis. This issue is going to hang around for a while. The press likes it. Paul Tucker wants to speak to the Treasury Select Committee to clarify what he said in October 2008. But any financial regulation, and a lot of normal governmental activity, affects the way the markets work. Rescues of failing financial firms involve some manipulation of the financial markets. Will Spinney at the ACT gives a number of examples of governmental manipulation of financial markets. I wrote a short paper about the crisis where I said:

The global financial crisis thus renders visible and urgent a perennial (although often ignored) tension in financial regulation with respect to the extent to which governments should intervene to fix the financial markets.

This issue deserves more serious consideration than the irresponsible throwing around of partisan criticism we are seeing – reminiscent of snowball fights in a playground (or whatever they do at Eton) – that it is getting. Precisely what governmental interventions in the financial markets are legitimate, and what are not?

update: Note Jonathan Portes:

The lack of discussion about the structure of these key funding markets in any of the UK banking reform proposals is a very serious omission.

barclays written evidence to treasury select committee re: libor July 3, 2012

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Barclays has published its written evidence for tomorrow’s hearing. The document raises some points I think are important.

First, the document states:

The traders’ behaviours captured within the settlement documents are not representative of the values and standards to which the vast majority of the 140,000 people that work at Barclays operate every day. Those colleagues serve with integrity; pride; and the utmost probity. They have been badly let down by the actions of a few.

There’s a confusion in the reactions to the scandal. On the one hand there is a problem in the culture of banking (especially investment banking) (see King, Osborne). On the other, there are the thousands of decent and upstanding people who work for banks. Andrew Tyrie (who is to run the Treasury Committee’s review) said yesterday:

By any standards, the LIBOR scandal, for which 20 banks around the world are now being investigated, is shocking. It has corroded trust in the UK financial services industry and it is a shameful affair. I find it particularly sad that it will have unfairly damaged the reputations of hundreds of thousands of our constituents who work hard and honestly in the financial services industry. The UK’s reputation has been tarnished, but it can be restored and enhanced if we draw the right lessons. The Treasury Committee will continue with its inquiry into what exactly happened. We will be holding the inquiry on Wednesday with the chief executive of Barclays, and we will also probably call the British Bankers Association and the regulators to find out exactly how this all happened.

There are some important questions here: did Barclay pick the wrong people to be responsible for making its Libor submissions, or did it not protect them sufficiently once they were in that position from the persuasions of a few bad apple traders? Do we need solutions aimed at ensuring only honest people are given such positions, or do we need to ensure that structures are established to protect people from weakness of character.

Second, Barclays states that it is:

ironic that there has been such an intense focus on Barclays alone, caused by our being first to settle in the midst of an industry-wide, global investigation.

Perhaps they should have better crisis consultants. The investigation into Libor fixing had been going on for some time, and was generally known to be ongoing. So the announcement of the first settlement in the context of the investigation was bound to attract attention, and the fact that the settlement related to behaviour before the financial crisis as well as during the crisis was startling (and the co-mingling of acts during these two different periods is generally problematic – much attention is focused on whether the Bank of England is to blame in relation to the crisis-related quotes) and bound to be noticed.

However, if it were to turn out that Barclays and its personnel were in fact more co-operative than other banks and suffered more in terms of harms to reputation and resignation than other banks and their personnel who were not so co-operative this would be a very bad thing for the future of financial regulation. It would be an invitation for targets of regulatory probes to be unco-operative in future.

libor developments July 3, 2012

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Yesterday, Marcus Agius, the Chairman resigned and then Bob Diamond, the CEO, resigned with Agius becoming full time Chairman and in charge of finding Diamond’s replacement. Jerry del Missier, the (recently appointed) COO (who was at Barclays Capital during the period of the Libor problems), also resigned. Mervyn King seems to have played a role in these developments. Monday’s announcement of Agius’ resignation was pretty clearly designed to protect Diamond. After all, the press reports before Monday focused on whether Diamond’s position was secure.

The Treasury Select Committee will hear from Diamond at 2pm on Wednesday.

The Chancellor made a statement in the House of Commons yesterday. He was very critical, asking, for example:

what urgent changes are needed in the regulation of LIBOR and other markets to prevent such abuse occurring again and to ensure that the UK authorities have the powers they need to hold those responsible to account; and the wider issue of what went so badly wrong in the culture of our banking system and the way it was regulated, allowing such fundamental failures of basic standards of conduct to go unchecked and unchallenged.

The interest rate manipulations were pretty shocking, but Osborne lives in a world where politicians have exaggerated their expenses claims and been over-friendly to unsavory news organizations. Perhaps he shouldn’t be so surprised.

A number of MPs pointed out that Osborne and other Conservatives hadn’t been so keen on regulating banks when they were in opposition. For example, here’s Glenda Jackson:

welcome the Chancellor’s commitment to broad-ranging and hard regulation for the British banking system-a position eschewed like the plague by his colleagues when they were in opposition. Will he guarantee that the powers given to the FSA will ensure that it is genuinely what many of my constituents have campaigned for for some time: a banking watchdog, not a lapdog?

Anyway, there will be a review of what needs to be done to fix regulation relating to this issue by Martin Wheatley, the chief executive designate of the Financial Conduct Authority. The review:

will include looking at whether participation in the setting of LIBOR should become a regulated activity, at the feasibility of using actual trade data to set the benchmark, and at making initial recommendations on the transparency of the processes surrounding the setting and governance of LIBOR.

His report will be produced “this summer” so that any conclusions can be fed into the new rules on financial regulation, either in the Financial Services Bill or legislation on banking reform.

The House of Commons spent some time wondering why what happened wasn’t a criminal offence (especially when they had constituents who had been charged with criminal offences over much smaller sums of money). That the SFO decided not to prosecute doesn’t necessarily mean it decided that no crime had been committed but could be based on concerns that it would be difficult to achieve a conviction.

The language of section 2 of the Fraud Act 2006 does seem to be broad enough to cover what was done. Under s. 2 a person commits fraud by dishonestly making a false representation, and intending by doing so to make a gain for himself or another. A false representation (which may be express or implied) is one which is untrue or misleading, where the person making it knows that it is, or might be, untrue or misleading.

False representations to the BBA about the rates at which Barclays could borrow funds in the interbank market could be seen as falling within this very general language. But the statute does not expressly cover statements whose effects are indirect. The explanatory notes on s 2. make it clear that the provision is meant to refer to representations made to the world at large (on a website) or to large numbers of people (such as phishing). But the explanatory notes seem to imply that what the section applies to is situations where representations are made directly to the victims of the fraud. There’s a specific provision for representations made to machines (such as ATMs). The explanatory notes state:

The main purpose of this provision is to ensure that fraud can be committed where a person makes a representation to a machine and a response can be produced without any need for human involvement. (An example is where a person enters a number into a “CHIP and PIN”machine.) The Law Commission had concluded that, although it was not clear whether a representation could be made to a machine, such a provision was unnecessary (see paragraph 8.4 of their report). But subsection (5) is expressed in fairly general terms because it would be artificial to distinguish situations involving modern technology, where it is doubtful whether there has been a “representation”, because the only recipient of the false statement is a machine or a piece of software, from other situations not involving modern technology where a false statement is submitted to a system for dealing with communications but is not in fact communicated to a human being (e.g., postal or messenger systems).

But this situation is different from the sort of indirect representations made in the context of any attempted manipulation of Libor rates. And this sort of uncertainty is problematic in the context of criminal statutes.