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Vice-President of the European Commission, EU Justice Commissioner
Amended Proposal for a Directive on Criminal Sanctions for Insider Dealing and Market Manipulation
Joint press conference with Commissioner Barnier/Brussels
25 July 2012
Background LIBOR scandal: why are we acting?
These days we are again dealing with the effects of potentially criminal misconduct in the financial markets. This time it is about interest rate-rigging by banks. The recently uncovered practice of manipulation of the LIBOR rates is another example of irresponsible banking practices undermining investor confidence and market integrity.
LIBOR and other similar indexes play a key role in the management of risk in our economy. They impact almost every financial service and product across the planet.
Just to give you an idea: these inter-bank rates influence borrowing costs for many people and companies as they are used to price some $550 trillion (€453 trillion) in loans, securities or derivatives. Morgan Stanley has estimated the costs to 11 global banks linked to the Libor scandal at EUR 12 billion in regulatory and legal settlement costs over the next two to three years.
But this is also about the simple consumer. We are talking about home mortgages, credit cards, student loans, and other consumer lending products. In fact, in the US more than 60% of rate mortgages and almost all the private students' loans were tied to LIBOR as a reference rate.
Keeping LIBOR artificially high or unusually low is a scam. Homeowners, small businesses and students may have paid higher interest rates because of the activity of certain bankers.
This shows: market abuse is not a victimless offence. It is a major problem for confidence in our financial system and we need to address it.
The recently-released e-mail exchanges between traders involved in the Barclays interest rate-rigging should make us pause. Their casual talk about popping bottles of champagne to celebrate the artificially fixed rates reveal a callous attitude that should have no place in banking.
The time has come to put an end to these practices where certain bankers – perhaps we should call them "banksters" – act like corrupt casino-dealers betting with their clients' savings and investments. Those who sponsor and brag about this culture of cheating with other people's savings will no longer be able to exploit regulatory loopholes in Europe.
What have we proposed today to prevent such cases?
With today's proposal we are completing the proposal for the Market Abuse Directive made in October 2011 to cover explicitly the manipulation or the attempt to manipulate benchmarks such as LIBOR. Today's proposal aims to criminalise the intentional transmission of false or misleading information manipulating the calculation of a benchmark.
Michel Barnier and I are joining forces to outlaw behaviour aiming at manipulating financial markets. We want to close any possible regulatory loopholes. There must be zero tolerance for manipulators in the EU financial markets. Criminal law can serve as a strong deterrence against any future manipulations.
What does it mean concretely? All Member States will have to make sure that manipulating the calculation of a benchmark is clearly inscribed in their national criminal codes and punished with effective sanctions.
The signal should be clear: the European Commission is serious in fighting market abuse and in protecting the integrity of our markets in the interest of our citizens.
The broader picture and next steps
But let's be clear: today's proposals are just one piece of the action needed. In parallel, we must strengthen banking supervision.
I was not convinced by the action of the Bank of England – as the competent banking supervisory authority – in this case. I would have expected to see greater energy in reacting to calls – some made already over four years ago – for the elimination of incentives to misreporting. This did not happen.
This whole scandal of LIBOR fixing reveals major faults in the governance of this process. First, it reveals shortcomings about the way in which these inter-bank rates are calculated. These rates are a public good. As such there should be more public authority involvement in the monitoring of the reporting process and in the determination of the rates.
Second, these rates were supervised too generously. LIBOR is constructed by an UK association but as the LIBOR rates are so deeply ingrained in so many financial contracts it affects people across the entire Union and around the globe. Therefore, we need to Europeanise banking supervision to make it stronger, fairer and more effective.
In a few weeks the European Central Bank looks set to become the head of the European single supervisory system for banks in the euro area. This will end the often too 'cosy' relationship that exists today between national supervisors and banks in their home country. It will enable a fully rigorous and independent supervision of our banking union – at European level.
Banks should no longer be able to behave like casinos. They should instead get Europe working again. They should resume lending to SME's, industry and other productive sectors of our economy – in order to restore trust and put our economies on the path of growth.