More than half the banking industry professionals around the world who were recently polled by a research firm say regulators turned a blind eye to inter-bank interest rate fiddling to preserve market confidence.

The survey, by Lepus, of banking staff at 44 institutions showed that 60 per cent believed regulators tolerated manipulation of rates such as LIBOR. The scandal, which in the summer saw Barclays hit with a £290 million fine and the resignation of chief executive Bob Diamond, has rocked confidence in London as a financial centre. A number of major banks are understood to be under investigation.

LIBOR rates are calculated for different currencies and borrowing periods ranging from overnight to one year and are published daily; financial institutions set their own rates relative to it – a multi-trillion derivative sector is tied to LIBOR.

One issue that arose when Barclays was fined was whether authorities such as the Bank of England or Financial Services Authority, for example, had tolerated, or at least failed to crack down, on manipulation at the height of the 2008 crisis as they may have feared that the scandal could further hit market confidence.

Pervasive

Some 57 per cent of survey respondents said rigging of LIBOR has been pervasive in the industry; 31 per cent said it was not widespread. Of those 12 per cent who responded to the “other” category, the majority said that “rigging” was too harsh a term but said a few banks, not a large number, may have submitted incorrect borrowing figures.  

The poll also showed that 43 per cent of respondents said that weak regulation led to the manipulation problem, while 16 per cent said compensation practices encouraged such behaviour and 10 per cent said a lack of authority by risk managers was a cause. Other respondents said a number of issues drove the scandal in addition to those previously given, such as lack of integrity, a legitimate fear of damaging market confidence, and informal and archaic processes of setting rates.

There were also wide differences of opinion between geographic regions as to what caused the manipulation. Outside the Asia-Pacific region, most cited weak regulation as the primary reason. Inside the Asia region, however, most said compensation practices that encourage short-termist behaviour was a key reason.

Some 91 per cent of respondents said the method of setting interbank rates needs to be changed. Among ideas suggested were that submitted interest rates should reflect the actual, not hypothetical, cost of borrowing and the pool of contributors for submitting LIBOR rates should expand.  

Lepus was founded in 1997 and provides research for the financial services industry. It is based in London.