Possible Explanations:1. Increase in counterparty risk• It Reduces the lending banks’ expected payoffs from providing unsecured funds to other banks and thus lowers their incentive to transact with one another.
2. Liquidity hoarding• Banks have come to rely much less on deposits as a source of funds and more on short-term wholesale funding.• It has become common for corporations to turn to markets rather than banks for short- term funding.
THE REGULATORS’ FINDINGS• The investigation has been carried out jointly by the Financial Services Authority (FSA) in the UK and the American Commodity Futures Trading Commission (CFTC).• On 27th June 2012, both regulators published the findings of a long joint investigation into LIBOR rate setting.
• 173 requests for US dollar LIBOR submissions were made.Jan 05-May • 11 requests based on communications from other bank 09 traders • 58 requests for EURIBOR submissionsSep 05- May • 20 requests based on communications from other bank 09 traders • 26 requests for yen LIBOR submissionsAug 06- June 09
• Trader A -“submits our settings each day, we influence our22 March 06 settings based on the fixings we all have”. • Trader B – Telephone conversation5 Feb 2008 • Euro Derivatives Traders sent emails to Manager C indicating that they had spoken to Barclays’ Submitter July 2008 about the desk’s reset positions
The Fine:The FSA fined Barclays £59.5 million inaccordance with section 206 of the FinancialServices and Markets Act 2000. This is thelargest fine ever imposed by the FSA.