Corporate Governance in Banks – A View Through the LIBOR Lens
Journal of Banking Regulation (2013)
14 Pages Posted: 27 May 2013 Last revised: 11 Aug 2013
Date Written: July 22, 2013
Misreporting of borrowing rates by large banks and the resulting manipulation of LIBOR (London Interbank Offered Rate) has been the subject of headlines news recently. Confronted with charges from regulators several banks, such as Barclays, UBS, and Royal Bank of Scotland (RBS), 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. There were internal failures at several levels in Barclays in the misreporting of rates which 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, which undoubtedly impacted the management culture at the banks. In particular, the loose structure of interest derivatives and the potential they offered for speculation were a factor in the practices seen at the banks involved in the LIBOR episode.
Keywords: Corporate governance, banks, LIBOR scandal, fiduciary duties, duty of loyalty, duty of good faith, financial liberalization, interest rate derivatives, speculation, internal control, conflict of interests
JEL Classification: E43, E44, G21, G28,G30, G38, K20, K22
Suggested Citation: Suggested Citation