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The LIBOR Manipulation, Who’s To Blame: Bankers Or The Process?

ImageThe LIBOR (London Interbank Offer Rate) is currently the centre of attention after the City Regulator ordered its biggest ever fine – £290 million penalty – to Barclays for manipulating the LIBOR rate.

Indeed, the recent revelations of the alleged manipulation of the LIBOR by most of the major banks have made this interest rate the top topic in the news around the world. However for me, the ultimate question is (as it has always been since April 2008 when the LIBOR stopped being in line with the UK base rate) to know whether the issue was actually the operator (i.e. the bankers) or the way the LIBOR is calculated/consolidated (i.e. the process).

Since 2007 at the beginning of the global financial crisis , I have been following the LIBOR rate. In April 2008, I started questioning the way the LIBOR was calculated as it started falling dramatically (at 2.48% from 4.22% in January 2008 and 5.27% in September 2007) and was no longer in line with the UK base rate (which was at 5% in April 2008). Although it must be said that the LIBOR does not necessarily always have to be in line with the base rate, I am however increasingly vindicated in my concerns with regards to the way Thomson Reuters (on behalf of the BBA) gather and consolidate data in order to reveal the daily LIBOR rate. Source of data:  

In practice, Thomson Reuters calculates and distributes LIBOR on behalf of the BBA. The BBA names the panel banks that submit the rates to Thomson Reuters and also sets the methodology Thomson Reuters follows for the calculation. Every morning Thomson Reuters receives the contributions electronically from the panel banks. It performs a series of high-level validity checks following the criteria set and agreed with the BBA. The rates contributed by the panel banks are meant to answer the question: “At what rate could you borrow funds …?”

Not too bad as a method of calculation but could it be more accurate & transparent?

Indeed, instead of relying on a panel of surveyed banks that provide data on their prospects of borrowing along with their forecast of liquidity which later are consolidated by an agency, would it not be more sensible to have a system where the actual rates of borrowing between banks are automatically recorded as transactions take place? Banks / financial institutions lending to each other at different rates …, the consolidation would ultimately and automatically takes place when financial markets close, thereby producing a rate that would be the market’s opening price?

I can already hear some critics arguing that the LIBOR rate is different from other rates or index values as this is solidly linked to the level of liquidity in circulation. But wait a minute, the same principle applies: if the rate falls below its real value, this will mean that there was plenty of liquidity in such a way that it became cheap … the rate will progressively appreciate as liquidity will become rare and the cycle will start again.

I can hear some others arguing that not all banks will be on the automated electronic system, thus some transactions will be missed out and therefore jeopardise the accuracy of the LIBOR. Hang on; does the current method include all banks? Is it not just a panel of banks set by the BBA?

Other critics suggest that the separation of the retail and investment banking is the ultimate solution. I have to admit that, although this would be a giant step towards resolving the current banking crisis, it would not however help to strengthen the current system in terms of the calculation of the LIBOR. Indeed, most of the so called retail banking products such as mortgages rely on the LIBOR rate; thus being able to manipulate the LIBOR will definitely impact both investment banking as well as retail banking.

With the current system, banks have been manipulating the Libor so as to get funds at a cheaper rate and to lift up gains on trading positions they hold. At this defining moment where we are still in the economic & financial tornado started in 2007 and generated by banks / financial institutions and where there have been some financial scandals (the alleged mis-selling of PPI & Interest Rate Swaps), we cannot really expect Imagebank professionals to suddenly change and no longer be greedy, no longer try to manipulate figures etc, can we? That would be very naïve. At the end of the day bankers are made to make money!  On top of all this, the recent IT issue that prevented millions of banks users (not only RBS/NatWest users – some other bank users could not receive payments as they were paid from a RBS/NatWest bank account) from accessing money has not helped to restore trust.

It is therefore pretty clear that bankers are not likely to deviate from their “raison d’être” that is “making money”. The only way to get this fixed is by making the process as robust as possible.

This paper is a first step of an article that I am preparing on the LIBOR System. This is a first thought aiming to raise questions. For example, is this the time to think about another process of calculating the LIBOR or should we stick to the current system expecting that the FSA (the first to blame in my opinion), the BBA and to some extent the Bank of England and the SFO would finally start doing their job properly?

July 8, 2012 Posted by | Articles In English, Economics, International Business, International Finance | , , , , , , , , , , , , , , | 2 Comments

BP’s Gulf of Mexico Oil Spill: The Warning Signal?

The Gulf of Mexico oil spill has been raising lot of questions with regards to offshore drilling. Much has already been said and unquestionably, many still have to be said. However, I would like to focus on one point: the lesson that developing countries should be learning from this, and the dilemma that they will probably soon be facing between, on one hand, the need for foreign direct investments and on the other hand the concern for their ecosystems; given that oil companies do not feel the same pressure when such accidents occur in third world countries and worldwide media do not really pay attention.

A Nigerian writer, Ben Ikari, recently said, while talking about the Gulf of Mexico oil spill, that “If this Gulf accident had happened in Nigeria, neither the government nor the company would have paid much attention … this kind of spill happens all the time in the delta.”

To back up Ben Ikari’s words, let me start by mentioning some oil spill accidents that happened quite recently in some third world countries. The most recent examples are the spill that happened in Singapore, Singapore Strait on the 25th May 2010 (oil company: MT BUNGA KELENA 3), or the one in Nigeria, Niger Delta on the 1st May 2010 (oil company: EXXONMOBIL). These oil spills did not cause any worldwide headlines whereas in these countries, people depend completely on the environment for their basic life needs such as drinking water, food, source of income and other basic daily life needs. So for these people, seeing Obama, the US president making daily speeches about the BP oil disaster; watching worldwide media such as BBC, CNN, Euronews, France24 talking about this minute after minute in their headlines; seeing BP oil using all their new technology and even deciding to stop paying dividends in order to ensure compensation for damage caused; is more than a surreal thing.

Referring to oil spills in developing countries, Ben Ikari carried on by saying that “The oil companies just ignore it. The lawmakers do not care and people must live with pollution daily. ..When I see the efforts that are being made in the US I feel a great sense of sadness at the double standards. What they do in the US or in Europe is very different.”


Coming back to my main point, namely the dilemma between on one hand the need for Foreign Direct Investments in developing countries and on the other hand the concern for their ecosystems: Undoubtedly, with this gulf of Mexico oil spill, big crude oil companies in the world will probably be forced to intensify offshore interests in developing countries such as the Gulf of Guinea, the Gulf of Aden -Yemen, the Niger Delta or the Angola’s offshore oil, where an incident like the Gulf of Mexico one will not probably retain world attention, obliging these companies to stop paying dividends. Indeed, with more potential offshore drilling restrictions / regulations coming in the USA, oil companies would have to explore new territories and this would indisputably lead them to countries with less regulation … Guess where I’m looking…

So, FDI at all costs?

Should oil companies abuse poverty in third world countries and put their governments in a situation where they would have to choose between FDI Vs damaging the ecosystem, FDI Vs sacrificing future generations or FDI Vs risking daily life?

Will developing country governments be able to strike a balance between attracting foreign investments and strict regulations that would protect not only their own peoples and ecosystems, but also be a guarantee for a sustainable development?

The debate is open, watch out!

June 20, 2010 Posted by | Articles In English, International Business, International Economics | , , , , , , , , , , | 3 Comments

MTN: Info ou Intox?


Plus que 7 jours et MTN, la firme panafricaine, sera peut être l’un des géants mondiaux de la téléphonie mobile!!!

En préparation des négociations qui se tiendront le 1ier octobre 2009 entre les firmes de téléphonie mobile MTN la sud-africaine et Bharti l’indienne, le ministre indien des finances Pranab Mukherjee a présidé hier mercredi 23 septembre 2009, une réunion d’évaluation des clauses légales du deal.

Un an après avoir échoué à trouver un accord avec l’opérateur panafricain MTN, Bharti le géant indien de téléphonie mobile, a annoncé très récemment être entré dans une nouvelle phase de négociations exclusives avec le groupe basé en Afrique du Sud.

Il y a en effet un an, l’une des plus importantes fusions de l’histoire des télécoms avait échoué. Les deux groupes, Bharti et MTN ne parvenant pas à se mettre d’accord. Les négociations reprennent donc et pourraient aboutir à l’émergence d’un  futur géant mondial, troisième opérateur de téléphonie au monde d’après le Wall Street journal.

Les deux partenaires se donnent maintenant jusqu’à début Octobre pour finaliser l’accord.

Si les deux opérateurs semblent déjà bien avancés dans les modalités financières de l’opération, reste à savoir maintenant s’ils arriveront à se mettre d’accord sur l’organisation opérationnelle du futur groupe. Il y a un an, les deux groupes avaient échoué sur ces modalités pratiques : Bharti, comme MTN, réclamait la direction du nouveau groupe. L’opérateur africain voulant même faire de son alter-ego indien une simple division.

Si l’accord est conclu, Bharti acquerra 49 % du capital de MTN, et ce dernier recevra en contrepartie 36 % du capital de Bharti Airtel. L’opération est évaluée à 20 milliards de dollars (14 milliards d’euro). La fusion regorgerait 200 millions d’abonnés en Afrique et en Asie. Bharti, dont la seule présence hors d’Inde est au Sri Lanka, serait en effet la plateforme d’investissements du groupe en Asie Pacifique, MTN devant lui, se consacrer aux marchés africains.

Bien qu’il y ait encore quelques soucis relevant de l’organisation opérationnelle, les deux opérateurs se sont néanmoins déjà  mis d’accord pour réaliser leur rapprochement en deux étapes : une première purement capitalistique, puis une fusion des deux opérateurs dans un second temps. Selon le communiqué de l’opérateur Bharti, « l’objectif final est de réaliser une fusion complète de Bharti et MTN dès que possible ». Une façon de renvoyer à plus tard l’épineux problème du partage des pouvoirs et de l’organisation opérationnelle du nouvel ensemble.
Depuis, les deux opérateurs ont continué à se renforcer : Bharti a annoncé, à l’occasion de la publication de ses comptes du premier trimestre 2009 (son quatrième trimestre fiscal), avoir atteint la barre des 100 millions d’opérateurs, un cap lui aussi franchi dans la même période par MTN. En termes de capacité donc, les deux groupes sont très proches.

September 24, 2009 Posted by | International Business | Leave a comment

Foreign Exchange Risk Management – Theory versus Practice: The Case of Two UK Based Firms

My dissertation project for a Masters in International Business (Option International Finance) was about how multinational companies manage FX risk exposure and how this compares to theory.

Using two UK based firms as a case study, I found out that there were differences in management practices between these two companies on one side, as well as between practice and theory on FX risk management. Differences were found namely in the choice of the type of risk to be managed and hedging instruments. Consistent with theory, cash flow matching (natural hedging) and forward contracts were the most used hedging instruments. However in terms of risk exposure, transaction exposure was the most managed in practice whereas economic exposure was the most relevant in literature. While translation exposure was often not hedged in practice and this was in line with theory, one of the companies in my study was sometimes managing its translation exposure.

Finally, theory argues that firms should first use internal/natural hedging techniques and then, if necessary, pass to external hedging techniques. The main argument being that external hedging is costly.  Graduate - ResIn practice, the two UK based companies I used in my project followed this strategy as they do natural hedging whenever it is possible. However, firms rarely (if not never) fully hedge their FX risk exposure because it is expensive and according to them, it does not completely eliminate FX risk exposure.




“Now that I am ready to fully start a career, I would like to express my deep gratitude to my project supervisor Dr PEIYI YU and my award leader Ms DAPHNE LAING.

Special thanks and gratitude to Mr & Mrs Anoke, my very dear parents, for all their support!!!”

February 28, 2009 Posted by | Articles In English, International Business, International Finance, MY DISSERTATION PROJECT | , , , , , , , , , , , , | 1 Comment