Treasury Today Country Profiles in association with Citi
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July/August 2012

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Crime and Punishment

The title of Dostoevsky’s literary masterpiece is a good reflection of what the global press has been reporting on in the banking sphere of late. And the stories in the newspapers do echo some threads of the classic novel’s plot. ‘Some’ being the operative word.

Raskolnikov, Dostoevsky’s protagonist, is a man of conscience and morals, but nevertheless he has a burning desire to take down a local female pawnbroker. He thinks of the old woman as a ‘leech on society’ and after much inner turmoil, he murders both her and her sister. In justifying his actions, Raskolnikov plans to put the pawnbroker’s money to use for the ‘greater good’. While Raskolnikov (albeit narrowly) gets away with the killings, he is gradually consumed by guilt. In the end, he confesses and is subsequently sentenced to prison and then forced into hard labour.

At this point, there may be sketchy parallels to be drawn with some of the rate-rigging traders that have been written about so prolifically over the past few weeks. After all, some have reportedly justified their criminal actions as being for the ‘public good’ – by submitting low LIBOR rates the banks involved, it has been said, were helping to keep overall confidence levels up.

Nevertheless, this is not the real denouement. It is not until the very end that the plot thickens: in the epilogue of the Russian tale, the wrong-doer is only accepted back into society when he truly expresses remorse for what he has done. So while the short-term LIBOR mudslinging continues, the forward looking question is how will the banks caught up in the scandal regain their ‘place in society’ – in other words the trust of their customers?

Yes, there will be fines and the scale of any legal action is simply too difficult to judge right now.

Naturally the regulators will also step in with further reforms to help address the public’s concerns. This will only add to the operational and financial burden being placed on banks though, whether they were involved in the scandal or not.

What is more, this will not necessarily fix the problem. Industry observers, for example, have been quick to criticise the fact that LIBOR is based on a subjective assessment, rather than actual figures. And Sir Mervyn King, Governor of the Bank of England, has already invited fellow central bankers to discuss a reform of LIBOR in September.

All this points to structural flaws in our current banking system which cannot be effectively addressed through ‘punishment’ alone.