The Libor Scandal: Three Things to Know

July 10, 2012 10:50 am (EST)

The Libor Scandal: Three Things to Know
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Following investigations into Barclays’ manipulation of London Interbank Offered Rates (Libor), CFR’s Sebastian Mallaby highlights three implications from the unfolding scandal:

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Conflicts of Interest Within Banks: Barclays’ distorted reports on borrowing rates demonstrate the system’s failure to prevent damage from conflicts of interest between banks and their traders. "Chinese walls don’t work," Mallaby says. "It’s a lesson we’ve learned over and over again in finance."

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The Role of Regulators: The alleged collusion between the Bank of England and Barclays indicates a critical challenge in the governance of financial markets: Regulators are forced to bend rules to protect banks, "not because they are bribed," says Mallaby, "but because they are blackmailed, in the sense that the banks, by threatening to go under and do untold damage to the economy, can force regulators to bend the rules on their behalf."

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Responding to the Scandal: Calls for cultural change and for executives to give up remuneration simply scratch the surface, Mallaby argues. "The real lesson to be learned here is that banks which are too big to fail are also too big to exist," he says.

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