Insurance

RBI should check if rigged Libor gypped our borrowers

Can we trust our bankers – any banker? Ever since Lehman Brothers crashed in 2008, the world has been wary about big banks that are too big to fail. The fear is that they are greedy, they rig things to their benefit, but are largely unaccountable for the systemic damage they cause in the end.

This opinion is likely to be reinforced with the Barclays Bank scandal, where the bank has agreed to pay $453 million in fines to US and British regulators after the bank pleaded guilty to rigging inter-bank lending rates, the London Inter-Bank Offered Rate (Libor) in particular. Libor is an artificial, but indicative, rate set by the British Bankers’ Association (BBA) based on the borrowing rates reported by its key banking partners. BBA represents over 223 banking members, but the big banks obviously carry more weight in setting Libor.

The question is this: shouldn’t our own Reserve Bank of India (RBI), as India’s banking regulator, be checking to see if Barclays and its Libor price rigging have damaged our interests in any way? But we will come to that a bit later. Let’s start with what we already know about the Barclays case so far.

In testimony before UK lawmakers, Barclays’ former CEO Robert Diamond, who quit in the wake of the scandal, admitted three things: that Barclays may have reported lower rates to the British Banking Authority (BBA) than warranted by its actual borrowing conditions; that fear of nationalisation after the Lehman crisis pushed the bank to indicate lower rates (the reasoning being that if Barclays reported higher borrowing costs, the government may think it is not able to raise capital and hence must be nationalised for systemic reasons); and that a current Deputy Governor of the Bank of England (BoE), Paul Tucker, who could well become the next Governor, had indicated to Barclays that there were concerns in the British government about the higher rates Barclays was reporting to the BBA. He...