Libor needed reform – but state control of market information is dangerous

Michael Mainelli
A£390M Libor fine for RBS and a $5bn (£3.2bn) US government lawsuit against Standard & Poor’s. In both the ongoing Libor and credit rating agency sagas, previously free and private information services are being pulled under regulatory control. The unwritten rule is that markets depend on information, that information should be competitively-provided, and that information should be diverse. But the new constitution that regulators are writing has turned this on its head. Markets are wild, private information providers are irresponsible, and they need to be regulated.

I favoured speedy government intervention and reform of Libor. Martin Wheatley’s review was exactly that – it was quick. And it also recognised the danger of letting Libor slip under government control. “Public ownership would change the relationship between the market that created and developed Libor, and the future evolution of the benchmark,” he argued. Wheatley realised that public control would “reduce the incentive and ability for Libor to adapt to the needs of market participants; and potentially affect the choice of benchmarks.” He didn’t mention the creation of new incentives for manipulation by politicians.

But governments are now claiming to help control markets by controlling information. Financial institutions should be ringing loud warning bells about the dangers they have created for themselves through their greed. Information providers have significant responsibilities; responsibilities that some shamelessly shirked. But that does not change the dangerous reality of long-term regulatory supervision.

We therefore need to set out clearly the case for private financial information provision. This shouldn’t be hard. It’s virtually the same case as for a free, independent and competitive press. Both arguments are based on the importance of transparency.

And this transparency should come from both directions. There has been a worrying lack of reform within the rating agencies, for instance. And the result of this reform vacuum is that, in Brussels, there are calls for government-owned agencies – a terrifying prospect. But there’s a simple way this can be resolved; companies and public organisations can declare the amount they pay for debt ratings in their accounts, as they do for audits. This would start to shed light on any potential conflicts of interest in the rating process.

There remains a deeper issue in the dark corners, however – a lack of competition. We need to root out, not tolerate, cosy cartels. Issues with Libor emerged within areas where competition wasn’t enforced. And there are other instances of information provision that are blighted by poor competition. We need clear roadmaps to drive Libor and other information providers towards competitive private delivery. But are we prepared to face up to competition?

Professor Michael Mainelli is chairman of Z/Yen Group and co-author with Ian Harris of The Price of Fish: A New Approach to Wicked Economics and Better Decisions.