G8 leaders can keep the momentum of global financial reform rolling.
In April 2013, it was announced that the Commodities Future Trading Commission (CFTC) is investigating Wall Street banks and the London-based firm ICAP, the world’s largest broker of interest rate swaps, for what has been called the twin brother to the LIBOR interest rate-fixing scandal of 2012. Matt Taibbi of Rolling Stone detailed how up to 15 megabanks, including Bank of America, JP Morgan Chase, Barclays, UBS, and the Royal Bank of Scotland may have been colluding with a small group of brokers at ICAP to manipulate the ISDAfix number used to calculate the prices of interest rates swaps used for debt-management by big cities, sovereign governments, and major corporations. Perhaps, as a U.S. federal judge said in his ruling dismissing a class action lawsuit against the banks for LIBOR-related offenses, it was our own fault for thinking banks were in a competitive market.
What would come of such an investigation? So far only Iceland has been willing to prosecute bankers for their misdeeds, while much of the U.S. and EU are still operating under the mindset of “too big to fail.” Both the SEC and the Department of Justice are notoriously revolving doors between Wall Street and government oversight. Few politicians, particularly in the U.S., have demonstrated the political willpower necessary for making painful, long-term reforms to regulation systems—not when the short-term consequences, including a drop in campaign donations, would hit before any perceived benefits, and before the next election cycle.
Yet at the same time, these issues are deeply harming our global potential for economic growth. Sovereign insolvency and fiscal instability is increasingly scaring off investment as well as innovation. Consumer confidence, still battered from the 2008 crisis and lingering high unemployment, is only further discouraged by reports of bank misbehavior.
So what can be done to improve global financial transparency? The International Monetary Fund has developed the “Code of Good Practices on Transparency in Monetary and Financial Policies” in cooperation with the Bank for International Settlements, as guidelines for best practices in financial transparency. Originally laid out in 1999, the Code warrants a reexamination in the wake of the cascading series of scandals since the 2008 financial crisis, as it advocates for public and open commitment to accountability.
First, the Code calls for a “clarity of roles, responsibilities, and objectives.” The relationship between financial institutions and oversight agencies must be “clearly defined, publicly disclosed, and written into law.” No longer can there be a revolving door between the big banks, sovereign governments, and the law firms that both represent the banks and provide pools of candidates for political appointees. A clear set of boundaries would prevent conflict of interests, such as the assistant U.S. Attorney General declining to prosecute anyone over the LIBOR scandal because, “Our goal here is not to destroy a major financial institution.”
Second, the Code calls for an “open process for formulating and reporting policy decisions.” Banks have to be transparent in their processes and decision-making. Nowhere has this been more clearly demonstrated than in the LIBOR scandal, during which traders would ask the “LIBOR submitters” to fudge numbers in exchange for day-old sushi or a bottle of champagne; or the ICAP scandal, in which traders would delay the reporting of numbers in order to get trades in before they go public. (In the stock market, this is called insider trading, and those convicted of doing it are subject to jail time.) It clearly results in a great deal of profit for not only the banks but also for those in charge of the trades; it is no wonder that Bloomberg reports the interest rate swap desk became known as “Treasure Island.”
Third, the Code calls for the “public availability of information on policies.” With trillions of dollars floating around, as it currently stands, it is a system ripe for manipulation. The European Federation of Financial Services Users wrote in the summer of 2012 that, “In general, those markets which are based on non-attested, voluntary submission of data from agents whose benefits depend on such benchmarks are especially vulnerable of market abuse and distortion.” If these numbers were reported in real time, as they are in the New York Stock Exchange, would be one step toward closing these vulnerabilities and creating a more transparent system.
Finally, the Code calls for “accountability and assurances of integrity.” Trust in corporate leadership, particularly banks, is at an all time low. It is not enough to simply implement reforms and regulation; leaders from both the public and private sectors must actively communicate progress to the public. Most importantly, there must be demonstrable progress, and leaders must be responsible to public opinion.
As world leaders gather, it is more important than ever that they take the suggestions for reform of the financial system toward further transparency seriously. The global economy has begun to recover, but the growth so far has not seemed to be sustainable, particularly with scandals such as these. Reform is needed now, more than ever before. Guidelines exist for this to happen, and it is now time for tangible results from these suggestions to come to fruition. G8 leaders can keep the momentum of global financial reform rolling.
This article was originally published in the special annual G8 Summit 2013 edition. Published with permission.
Photo: G8 UK Presidency (cc).
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G8 Challenges: After LIBOR and ICAP, What’s Next for Financial Transparency Reform?
June 26, 2013
G8 leaders can keep the momentum of global financial reform rolling.
In April 2013, it was announced that the Commodities Future Trading Commission (CFTC) is investigating Wall Street banks and the London-based firm ICAP, the world’s largest broker of interest rate swaps, for what has been called the twin brother to the LIBOR interest rate-fixing scandal of 2012. Matt Taibbi of Rolling Stone detailed how up to 15 megabanks, including Bank of America, JP Morgan Chase, Barclays, UBS, and the Royal Bank of Scotland may have been colluding with a small group of brokers at ICAP to manipulate the ISDAfix number used to calculate the prices of interest rates swaps used for debt-management by big cities, sovereign governments, and major corporations. Perhaps, as a U.S. federal judge said in his ruling dismissing a class action lawsuit against the banks for LIBOR-related offenses, it was our own fault for thinking banks were in a competitive market.
What would come of such an investigation? So far only Iceland has been willing to prosecute bankers for their misdeeds, while much of the U.S. and EU are still operating under the mindset of “too big to fail.” Both the SEC and the Department of Justice are notoriously revolving doors between Wall Street and government oversight. Few politicians, particularly in the U.S., have demonstrated the political willpower necessary for making painful, long-term reforms to regulation systems—not when the short-term consequences, including a drop in campaign donations, would hit before any perceived benefits, and before the next election cycle.
Yet at the same time, these issues are deeply harming our global potential for economic growth. Sovereign insolvency and fiscal instability is increasingly scaring off investment as well as innovation. Consumer confidence, still battered from the 2008 crisis and lingering high unemployment, is only further discouraged by reports of bank misbehavior.
So what can be done to improve global financial transparency? The International Monetary Fund has developed the “Code of Good Practices on Transparency in Monetary and Financial Policies” in cooperation with the Bank for International Settlements, as guidelines for best practices in financial transparency. Originally laid out in 1999, the Code warrants a reexamination in the wake of the cascading series of scandals since the 2008 financial crisis, as it advocates for public and open commitment to accountability.
First, the Code calls for a “clarity of roles, responsibilities, and objectives.” The relationship between financial institutions and oversight agencies must be “clearly defined, publicly disclosed, and written into law.” No longer can there be a revolving door between the big banks, sovereign governments, and the law firms that both represent the banks and provide pools of candidates for political appointees. A clear set of boundaries would prevent conflict of interests, such as the assistant U.S. Attorney General declining to prosecute anyone over the LIBOR scandal because, “Our goal here is not to destroy a major financial institution.”
Second, the Code calls for an “open process for formulating and reporting policy decisions.” Banks have to be transparent in their processes and decision-making. Nowhere has this been more clearly demonstrated than in the LIBOR scandal, during which traders would ask the “LIBOR submitters” to fudge numbers in exchange for day-old sushi or a bottle of champagne; or the ICAP scandal, in which traders would delay the reporting of numbers in order to get trades in before they go public. (In the stock market, this is called insider trading, and those convicted of doing it are subject to jail time.) It clearly results in a great deal of profit for not only the banks but also for those in charge of the trades; it is no wonder that Bloomberg reports the interest rate swap desk became known as “Treasure Island.”
Third, the Code calls for the “public availability of information on policies.” With trillions of dollars floating around, as it currently stands, it is a system ripe for manipulation. The European Federation of Financial Services Users wrote in the summer of 2012 that, “In general, those markets which are based on non-attested, voluntary submission of data from agents whose benefits depend on such benchmarks are especially vulnerable of market abuse and distortion.” If these numbers were reported in real time, as they are in the New York Stock Exchange, would be one step toward closing these vulnerabilities and creating a more transparent system.
Finally, the Code calls for “accountability and assurances of integrity.” Trust in corporate leadership, particularly banks, is at an all time low. It is not enough to simply implement reforms and regulation; leaders from both the public and private sectors must actively communicate progress to the public. Most importantly, there must be demonstrable progress, and leaders must be responsible to public opinion.
As world leaders gather, it is more important than ever that they take the suggestions for reform of the financial system toward further transparency seriously. The global economy has begun to recover, but the growth so far has not seemed to be sustainable, particularly with scandals such as these. Reform is needed now, more than ever before. Guidelines exist for this to happen, and it is now time for tangible results from these suggestions to come to fruition. G8 leaders can keep the momentum of global financial reform rolling.
This article was originally published in the special annual G8 Summit 2013 edition. Published with permission.
Photo: G8 UK Presidency (cc).
