Saturday, August 4, 2012

RBS chief Stephen Hester says banking has hit 'new low'

As reported by the Guardian, banking has hit 'new low' as a result of Libor scandal according to RBS chief Stephen Hester.

"The Libor situation is on our agenda and is a stark reminder of the damage that individual wrongdoing and inadequate systems and controls can have in terms of financial and reputational impact. This is the subject of ongoing regulatory investigation but our customers and shareholders should be in no doubt that we are taking it seriously," Hester said. 
Admitting that the reputation of the industry was at "new lows", Hester added: "This is dangerous because customer trust is a pre-requisite for a successful banking sector and an effective banking sector is so important to economic stability and growth....
"We are in a chastening period for the banking industry.
What the Libor scandal has revealed is that bankers knowingly abused the trust of their customers to profit at both the individual and firm level.

Customers trusted that the banks acted with integrity and submitted interest rates for inclusion in Libor that reflected their actual cost of raising funds on an unsecured basis in the interbank lending market.

This trust was violated by every bank on the Libor panel.

Your humble blogger says this because everyone knew that the interbank lending market froze in 2008.

No bank could borrow because no lending bank could determine if the borrowing bank was solvent or not.  This fact was confirmed by the Financial Crisis Inquiry Commission.

If the market is frozen, then how could any firm have borrowed money?  The interest rate basically went to infinity.  However, that is not what Libor showed.  Hence, all the banks on the panel lied.

Regular readers know that preventing banks from lying in the future about their financial condition is one of the reasons that your humble blogger has been calling for banks to be required to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

It just so happens that this same data is also necessary if banks with deposits to lend are to be able to independently assess the risk of the borrowing banks.  It is the ability to independently assess risk that unfreezes the interbank lending market and keeps it open in the future.

With a functioning interbank lending market, Libor can be based on actual, easily confirmable trades.

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