The revelation of attempts to manipulate Libor and other rates is truly shocking. Not just because of the impacts on financial contracts ranging from mortgages to derivatives. There is also a deeper reason.
Capital markets require trust if they are to work well. If you cannot trust the intermediaries who make up those markets to operate with integrity, that has a corrosive effect on the whole system. Investment managers need well-functioning markets if they are to be able to invest their clients’ money optimally. And that requires high standards from the intermediaries, in particular the investment banks. This episode – and no doubt the revelations that are still to come – suggests that those standards have not been met. And that is a matter of real concern.
Investment managers, who are key users of the markets, have reacted to these events with concern and anger. Many are asking whether their clients have lost out as a result, but at this stage it is very hard to say. Until there is a fuller picture of what other banks were doing it is impossible to say whether the result was a Libor rate that was different from what it should have been. And even then tracking through to establish what, if any, the effect on individual portfolios would have been – via the closing of derivative positions, for example – would be mind-bendingly complex.
But investment managers also have an interest as investors in banks. And they have not proven successful investments: the index of bank stocks has fallen by two-thirds in the last five years. With talk of class action suits in the US and elsewhere, investors may start to wonder how well those at the top of the banks have fulfilled the role of stewards of their investments. And that in turn may lead them to question who should be in charge.
There have already been departures at the top of Barclays. That will address one set of issues. But the pressure on shareholders to step up where things go wrong will continue. And the industry will need to respond.
Much of the investor unease with Barclays – reflected in a significant vote against the remuneration report at its recent AGM – stemmed from the dominance of the investment banking arm within the group. This makes doubly relevant the forthcoming legislation to implement the ring-fencing of retail from investment banking recommended by the Vickers Commission.
IMA has consistently supported ring-fencing, and advocated something very similar in our initial submission to the Commission in 2010. It has been opposed energetically by the banking industry – indeed we at the IMA have on a number of occasions been lobbied by banks trying to get us to change our stance. One silver lining to this current cloud is that further attempts to water down the Vickers recommendations will be doomed to failure. Indeed the reverse is much more likely – the proposals will now be strengthened before the Bill is introduced in Parliament.
This story is far from played out yet. Its ramifications will be felt by many for years to come.
Richard Saunders is chief executive of the Investment Management Association