Corporate governance in banks – A view through the LIBOR lens

Abstract

Misreporting of borrowing rates by large banks and the resulting manipulation of London Interbank Offered Rate (LIBOR) has been the subject of headlines news recently. Confronted with charges from regulators, several banks, such as Barclays, UBS (originally Union Bank of Switzerland) and the Royal Bank of Scotland, have paid huge fines and settled the matter to avoid criminal prosecution. The scandal raises serious questions of corporate governance, and this article examines the issue from the governance perspective, using Barclays as a case study. Internal failures occurred at several levels in Barclays’ reporting of rates. Misreporting was mainly of two varieties – misreporting for personal gain and misreporting encouraged by senior managers, ostensibly in the corporate interests. The article argues that corporate governance systems and structures are powerless in dealing with such fraud or lack of judgment. Misreporting for personal benefit was clearly a breach of the fiduciary duty of loyalty of the managers involved. But misreporting, ostensibly to protect corporate interests, is more probably a breach of the emerging fiduciary duty of good faith. The article also points out that the misdeeds occurred in the banks during an era of financial liberalization and permissiveness. In particular, it highlights that the loose structure of interest derivatives and the potential they offered for speculation were important factors in the practices at the banks involved in the LIBOR episode. The article concludes with an analysis of the implications of the LIBOR episode and its consequences for corporate responsibility and accountability as well as public regulation and its efficacy.