Question

What does the LIBOR scandal tell us about the importance of studying ethics?

Answer 1

The LIBOR Scandal rose in 2012 when some bankers at many major financial institutions to manipulate the London Inter bank Offered Rate (LIBOR) for the purposes of profit. LIBOR plays a pivotal role in determining the determining the rates charged on many other kinds of loans. LIBOR is calculated on daily basis. It reflects the interest rate that banks pay to borrow money from each other.

Among the financial institutions that became caught up in the scandal were Deutsche Bank, Barclays, UBS, Rabobank, HSBC, Bank of America, Citigroup, JPMorgan Chase, the Bank of Tokyo Mitsubishi, Credit Suisse, Lloyds, WestLB, and the Royal Bank of Scotland.

Following were the main points in LIBOR Scandal:

• Some banks reported artificially low or high-interest rates to benefit their derivatives traders, undermining a major benchmark for interest rates and financial products.
• It went for many years and many major financial institutions were involved into it.

LIBOR Scandal and ethics:

• The key principle of ethical behavior involves honesty, openness, transparency and fairness, LIBOR scandal violated all these principles. An organization is expected to abide by ethics disclosing the true and fair financial position to the stakeholders but LIBOR Scandal many banks violated this principle.
• In the LIBOR scandal, some banks reported artificially low or high-interest rates to benefit their derivatives traders. Because LIBOR is also used as an indicator of a bank’s health, some banks were able to make themselves appear stronger than they actually were by reporting fictitious rates.Ethically this will have negative impact on customers, people indulging in stock markets and derivative trading as they may make wrong investments and loose their hard earned money. All this will impact the economy in negative way.
• LIBOR is used in the pricing of many of the financial instruments used by corporations and governments. LIBOR scandal affected these institutions negatively because of rate fixing.
• The LIBOR is not a single interest rate, but an array of them, based on different currencies and different loan durations. Because of this scandal financial markets, people engaged in currency trading were adversely affected.
• LIBOR plays central role in global finance.The LIBOR is used to determine everything from the interest rates that giant corporations will pay for loans to the rates individual consumers will pay for home mortgages or student loans. As a result of this scandal these stakeholders were affected negatively.

LIBOR was introduced in 1960 to regulate the unregulated system of global lending based on interest rates. It was established to bring transparency and fairness in interest rates globally. LIBOR scandal violated all these ethics. The LIBOR manipulation’s investigation clearly showed “systemic governance failures that question the structural integrity of current models of financial regulation. LIBOR scandal highlighted the failing regulatory system and ongoing culture of impunity. Regulations ought to be dynamic and responsive to the corporate institutional behaviour and professional behaviours of employees. LIBOR scandal highlighted the dark side of financial institutions. LIBOR scandal raised an important questions that Do corporate organizations follow ethics? Are the banks where we are depositing money or utilizing their other services safe for our hard earned money? This scandal taught us that business ethics should be strictly followed and only a culture of ethics can promote a fair and just financial system leading to robust and developed world economy.