Bob Diamond,
high profile CEO of Barclays was forced to resign last month over the
manipulation by Barclays of the LIBOR. Barclays was fined nearly 300 million
pounds by British and American regulators over the corporate sin. LIBOR is the
London Interbank Offered Rate. It is fixed each day by an eighteen member
selected panel of banks, members of the
British Bankers Association indicating the rate they would have to pay to
borrow if they needed money. The top four and the last four estimates are
discarded while an average is taken of the rest. The banks are expected to act
with trust and transparency recognizing the implicit burden of trust that the
public places on their daily estimates because the LIBOR is used as a benchmark
for pricing of many financial instruments including savings rate, mortgages,
commercial lending and the pricing of financial derivatives. Each bank quote
into LIBOR calculation essentially is an estimate of the inherent composite risk
of the bank on a daily basis. Given the wide use of LIBOR as a benchmark for
the pricing of global financial instruments, it is remarkable that the process
is not managed by government or a regulator but privately by the British
Bankers Association. Such is the implicit public trust in the process and in
the selected bank panel. British regulators uncovered evidences that Barclays
traders pushed their money market desk to doctor submissions for LIBOR with the
intent of gaming the process and making huge undeserved profits. There were
also evidences that they might have colluded with their counterparts in other
banks in gaming and manipulating the LIBOR process.
Bob Diamond
had arrogantly told the British Parliament January last year, in the heat of
the financial derivative crisis where banks acted irresponsibly and ruined the
financial assets of investors that the “time for remorse is over”. It was a
sad, insensitive comment from a CEO in an industry that the public expected
would still be sober given the ruin they brought to many investors and
financial system through the casino mortgage financial derivatives. Diamond was
forced by the LIBOR scandal to eat his words and resign. The irresponsible
behavior of the banks had cost tax payers billions of pounds used in bailing
out some of British leading financial institutions. There are important
leadership and regulatory lessons to learn from the Barclays LIBOR saga for us
in Nigeria.
CEOs
especially those in industries with significant public interest must recognize
that they have a responsibility to balance shareholder returns, their quest for
huge personal bonus with the larger interest of society. Bob Diamond told the
British Parliament that he loved Barclays. He also obviously loved his huge
bonuses. He did not however seem to recognize that he also needed to love the
society and the public that gave Barclays its charter to trade as Bank. Corporate
wealth and prosperity is best sustained when society also prospers as a result
of business doing its business. Business must create economic value for
society. It should be its “reason for being” and its purpose. Its profit should
only be a by-product of doing this. Investment Banking, where Bob Diamond was weaned
seemed to have forgotten this over the years as it excessively focused on
profits and the bonuses of its managers. Everything else seemed to be worthy of
sacrifice to achieve the two. With such poor social ethic with which investment
banking has been largely run, it is very easy for its practitioners to move from
low social ethic to sheer criminality as the Barclays LIBOR scandal suggests.
The Barclays LIBOR saga is another evidence that investment banking needs to be
re-invented to have a social conscience. It is however not just investment
banking. CEOs and corporate leaders have a responsibility to ensure that their
organizations should never lose sight of society and the social purpose of
their business even in their quest to create shareholder value. They must be
the champion of social ethic within their organizations recognizing that
sustainable shareholder wealth creation is only possible when it is balanced
with the larger interest of society and its well being. While Bob Diamond may
claim, though incredibly, that he is not aware of the manipulation of LIBOR by
his traders, he is responsible as CEO for the culture of his organization, its
values and the norms of acceptable behavior. By making public statements such
as “the time for remorse is over”, Bob Diamond might have signaled to his
traders that it is back to impunity, back to “business as usual” as in the old
times of irresponsible casino banking.
The Barclays
LIBOR saga also illustrates the limits of self regulation. Unless sufficient
safe guards are in place to protect public interest, we should not trust that
business will always act responsibly. The process of setting LIBOR should no
longer be left to the private British Bankers Association. It has to be taken over
by an independent financial service regulator who will balance industry
concerns with public interest. Self-regulation
seems to be failing in many spheres. We have seen the limitations of self-regulation
in the British media with the abuse of press freedom by the Murdoch’s News of
the World. While we will always be uncomfortable with tendency by governments
to over-regulate and potentially make markets inefficient, the fact is that we
are in an era where business seems to have adopted a maxim of “greed is good”.
With increasing industry concentration where few oligopolies control many
industries, corporations have emerged far more powerful than their atomized
customers and the governments that should protect them. The oligopolies find
clever ways to cooperate further increasing their bargaining power relative to
their customers which eventually lead to market inefficiencies or even market
failure. The case, therefore for strong regulation, for a new era of regulatory
activism where industry interests are better balanced with societal interest
have never been stronger. Regulation must promote stronger and fair
competition. The principle of significant market power must be evoked in public
interest industries like financial services, energy and telecommunications to
ensure that no player hold so large a share of market as to stifle competition.
The Barclays LIBOR saga also raises the debate whether retail
and investment banking should co-exist in the same bank. Investment banking
with his inherent high risk, its casino nature where huge profits could be made
overnight and the same profits and institutional capital wiped off the next day
with trading losses, put retail banking customer deposits and the overall bank
capital at risk. Attempts by regulators to prescribe new capital cover for
investment banking assets might not have gone far enough. The experience of the
last period is that governments using public taxes will still have to bail out
the banks that are “too big to fail”
when investment banking fiasco happens in order to protect retail deposits and
prevent a disastrous collapse of the financial system. There is therefore an
implicit and inherent guarantee of investment banking risk by public taxes that
if they go overboard, that governments will step in especially if the banks are
too big to fail. It is argued that this in itself tend to make investment
banking take excessive risks as their profits and bonuses can be privatized
while their excessive losses could be potentially socialized. A separation of investment and retail banking
will ensure that governments have no reason to intervene if a stand-alone
investment bank fails and wipe off its own capital. Public deposits would not
have been put at risk. This will significantly moderate excessive casino risk
behavior in investment banking and its impact on the financial system. This is
a raging debate internationally on the management of the financial system which
we also need to have actively in Nigeria. As the Nigeria banking sector gets
more consolidated with increasing concentration, and our big retail banks
pursue investment banking ambitions, it is critical that our regulators put the
right safe guards in place to protect public deposits and the retail business
which is a critical backbone of the stability of the financial system.
Olu Akanmu is an executive in the telecommunications
industry. He publishes a blog on Strategy
and Public Policy on www.olusfile.blogspot.com
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