I know that there are a large number of people who argue that we've not done enough to punish the banks for what they got up to before the crash. But even they should cheer the announcement that has been made today, about the fines that the European Union has imposed upon banks for fixing interest rate benchmarks. There's two reasons for this: the first is simply the sheer size of the fines and the second is a good bit of applied game theory.
As to the first, the sizes of those fines:
Royal Bank of Scotland and Barclays are among a raft of global banking giants involved in a record €1.7 billion settlement with European regulators in the latest rate-rigging crackdown.
Eight banks have agreed penalties with the European Commission over allegations they formed cartels to fix two key benchmark interest rates used to set the price of trillions of dollars of financial products, from mortgages to complex financial products. RBS will pay €391 million for its role in the attempted rigging of the Yen Libor and Euribor — the Tokyo and euro area equivalents of the London interbank offered rate (Libor).
This is hugely larger as a fine than the amount that the banks actually made. Which is quite right of course.
In a little more detail, there are actually two different sets of allegations about Libor rigging. The first is that traders with positions would cajole (or bribe with drink etc) the reporting people within their own bank to move the reported rate their way. So that their positions would make more money. Given that several people at several banks were doing this it's not really clear whether the wider market was all that damaged: for of course the various unconnected attempts to move the reported rate would be aiming in random directions.
The second allegation is more difficult to deal with: this is that at the depths of the crisis the banks were all under-reporting Libor. For what is actually reported is what can your own bank borrow at in today's market and in size? And at the bottom of that market there really wasn't a market in size. It just didn't exist: so banks were necessarily calling in rates that rather ignored the effects of the crisis. This wasn't entirely legal of course but was probably better than their reporting near infinite rates which would have just undermined confidence even more. And no one's really all that interested in investigating this further either.
The bit of game theory is shown here by FT Alphaville:
There are still other banks and brokers who are holding out and presumably waiting for a court case. And they won't get that discount if the case is proven against them.
The second part of the game theory is that Barclays, one of the prime companies involved, ends up paying nothing at all. This is because it was the whistleblower. The company that went to the authorities to tell them about it and then cooperated all the way through the investigation.
Yes, I know, it's not uncommon to see this these days (exactly the same applies to investigations into other cartels by the EU for example) but it is a way out of the prisoners' dilemma for the authorities. If everyone keeps quiet then nothing can be proven: but that standing offer that if you're the first to inform you get off scott free will lead to more people doing that informing.
