LIBOR (London Interbank Offered Rate) was a benchmark interest rate intended to reflect the cost at which major banks could borrow from one another in the London market. It was used worldwide in the pricing of loans, mortgages, derivatives and other financial contracts.
LIBOR was referenced in financial contracts with a notional outstanding value of at least US$500 trillion. Misconduct involving the benchmark occurred across numerous major international banks, yet the regulatory response centred on substantial fines, individual prosecutions, management action and regulatory reform rather than closure of the institutions themselves.
Widespread Misconduct Without Institutional Closure
The LIBOR scandal provides an important comparison when considering the regulatory treatment of BCCI. Investigations revealed that traders and employees at a number of major international banks had attempted to manipulate LIBOR and other benchmark rates, either to benefit their trading positions or, in some instances, to influence perceptions of their institutions' financial strength.
The Parliamentary Commission on Banking Standards subsequently regarded the scandal as reflecting serious failures in both individual and corporate standards within banking.
In the United Kingdom, regulators took enforcement action against major institutions including Barclays, UBS, Royal Bank of Scotland, Rabobank, Lloyds Bank/Bank of Scotland and Deutsche Bank, as well as brokers involved in benchmark submissions. The Financial Conduct Authority recorded more than £757 million in UK fines relating to LIBOR and EURIBOR misconduct.
The extent of the misconduct varied considerably between institutions:
Barclays - misconduct involved LIBOR and EURIBOR submissions over a number of years and included employees seeking to influence benchmark submissions in ways advantageous to derivatives trading positions.
UBS - extensive LIBOR and EURIBOR misconduct involved derivatives traders and benchmark submitters across several currencies and locations.
Royal Bank of Scotland (RBS) - regulators identified at least 219 documented inappropriate requests relating to benchmark submissions, together with an unquantifiable number of oral requests, involving at least 21 individuals.
Rabobank - misconduct extended across several benchmark currencies and continued over a number of years.
Lloyds Banking Group/Bank of Scotland - regulators identified serious benchmark-related failings against the background of an international over-the-counter interest-rate derivatives market valued at approximately US$490 trillion at the end of 2012.
Deutsche Bank - regulators identified extensive LIBOR and EURIBOR misconduct involving traders and submitters across different parts of the institution.
Enforcement authorities generally did not publish a single aggregate figure representing the value of transactions directly affected by misconduct at each individual bank. The wider significance lies in the extraordinary scale of the markets dependent upon these benchmarks.
Wider International Involvement - Citigroup and HSBC
The investigations extended beyond the institutions principally associated with the UK LIBOR enforcement actions.
Citigroup was involved in the European Commission's investigation into cartels concerning Japanese yen interest-rate derivatives. The Commission found that traders at participating banks discussed JPY LIBOR submissions, trading positions and other commercially sensitive information. Citigroup was found to have participated in three infringements lasting between one and three months and was fined approximately €70.02 million. It received reductions for cooperation and full immunity in relation to one infringement after providing information to the Commission.
HSBC was investigated separately in connection with euro interest-rate derivatives linked to EURIBOR. In December 2016, the European Commission found that HSBC, Crédit Agricole and JPMorgan Chase had participated in anti-competitive conduct concerning euro interest-rate derivatives. HSBC was initially fined approximately €33.6 million. Subsequent European court proceedings upheld the finding of HSBC's participation while annulling the original fine because of deficiencies in the Commission's explanation of how the penalty had been calculated.
These cases demonstrate that benchmark-related misconduct extended across a broad range of major international banking groups and jurisdictions.
The Scale of the Market
The significance of the misconduct cannot be measured simply by the fines imposed.
LIBOR was one of the world's most important financial benchmarks and was referenced in contracts with a notional outstanding value of at least US$500 trillion. Outstanding over-the-counter interest-rate derivatives alone were estimated at approximately US$490 trillion at the end of 2012.
Even very small movements in a benchmark rate could therefore influence the value or profitability of financial contracts worth millions or billions of dollars.
The benchmark itself governed contracts measured in hundreds of trillions of dollars, and misconduct occurred at numerous globally significant banks. Regulators imposed substantial fines, prosecuted individuals and introduced major reforms to benchmark-setting and internal controls, but the institutions themselves were not closed.
The significance of LIBOR therefore went well beyond the internal affairs of the banks concerned. Manipulation of even small movements in the rate had the potential to affect counterparties, businesses and customers far removed from the traders making the submissions.
Regulatory Reform
The scandal led to extensive regulatory and parliamentary investigations.
The Wheatley Review of LIBOR, published in September 2012, recommended comprehensive reform of the benchmark, including stronger regulation, improved governance and more effective sanctions. The Government accepted its recommendations.
Parliament subsequently established the Parliamentary Commission on Banking Standards, whose 2013 report Changing Banking for Good examined the wider problems of banking culture, accountability and regulation exposed by LIBOR and the financial crisis. The Commission regarded LIBOR as an episode that crystallised wider public concern about standards across the banking industry.
The Comparison with BCCI
The comparison with BCCI is not that the underlying misconduct was identical.
BCCI faced allegations involving false accounting, concealed losses and other serious irregularities, whereas LIBOR principally concerned manipulation of financial benchmarks and related trading conduct by individuals within a number of major institutions.
The relevant issue in considering double standards is the markedly different regulatory response.
In the LIBOR cases, regulators generally distinguished between wrongdoing by individuals or parts of an organisation and the continued existence of the institution itself. Banks were fined heavily, employees were dismissed or prosecuted, management and control failures were criticised, and the regulatory framework was changed. The banks themselves nevertheless continued to operate.
That response contrasts sharply with BCCI in July 1991. BCCI's international operations were abruptly closed through coordinated regulatory action, notwithstanding the financial support of its Abu Dhabi majority shareholders and an extensive restructuring programme that had been under development.
The subsequent public narrative frequently treated alleged misconduct at BCCI as evidence of an institution-wide “criminal culture”, affecting the reputation of the Bank and thousands of employees who had no involvement in the wrongdoing alleged against particular individuals or operations.
This distinction lies at the centre of the argument developed in Double Standards - The Untold Story. Its chapter “The Big Fish and LIBOR” contrasts the treatment of major Western banks implicated in benchmark manipulation with the response applied to BCCI.
The issue is not whether misconduct at BCCI should have been investigated or punished - it clearly should have been wherever established - but whether the regulatory principle of isolating wrongdoing, penalising those responsible and preserving otherwise viable banking operations was applied consistently.
The later LIBOR experience demonstrated that even widespread and prolonged misconduct involving numerous employees across major financial institutions did not necessarily lead regulators to conclude that the entire institution should be closed. Instead, authorities generally relied upon fines, prosecutions, management changes and regulatory reform.
This raises a legitimate historical question:
If major international banks involved in manipulation of one of the world's most important financial benchmarks could be investigated, penalised and reformed while continuing in business, why was similar consideration not given to preserving and restructuring the viable parts of BCCI?
For former BCCI employees, creditors and shareholders, the contrast remains particularly significant: the LIBOR banks were punished and reformed; BCCI was closed and subsequently came to be defined largely by misconduct alleged against parts of the organisation.
Whether that difference was justified by the particular circumstances of the two cases remains open to question. Nevertheless, the contrast provides an important basis for examining the consistency, proportionality and fairness of international banking supervision, especially in relation to the decision to close BCCI.
Also read:
- Double Standards – The Untold Story
- The Fix: How Bankers Lied, Cheated and Colluded to Rig the World's Most Important Number (2017)
- The Spider Network: How a Math Genius and a Gang of Scheming Bankers Pulled Off One of the Greatest Scams in History (2017) - David Enrich,
- Rigged: The Incredible True Story of the Whistleblowers Jailed for Exposing the Rotten Heart of the Financial System (2023) - Andy Verity,
- HM Treasury, The Wheatley Review of LIBOR (2012)
- House of Commons Treasury Committee, Fixing LIBOR: Some Preliminary Findings (2012)