Left unattended, they are prone to instability, excess and abuse. Following the global financial crisis, a series of scandals ranging from mis-selling to manipulation undermined trust in banking, in the financial system, and to some degree, in markets themselves. In FICC markets, misconduct was revealed on a scale that impaired their ability to function fairly and effectively. The economic consequences have been enormous. Global banks’ misconduct costs have exceeded $ billion, capital that could otherwise have supported around $ trillion of lending to households and businesses. 5  More worrying still, an industry of the scale, importance and complexity of finance needs social capital as well as economic capital in order to operate, innovate and grow. Repeated episodes of misconduct have called the social licence of finance into question. In a system where trust is fundamental, it ought to be of grave concern that only 20% of UK citizens now think that banks are well run, compared to 90% in the 1980s. 6  The scale of the challenge of restoring trust is thrown into sharp relief by the FMSB’s comprehensive review of misconduct over the past two centuries. The history of financial fraud has rhymed all too frequently. Potential Solutions  In the cycle of scandal, response, integrity, drift, and renewed scandal; potential solutions have oscillated between the extremes of Self Regulation and Total Regulation. Recent difficulties illustrate the problems with each of these approaches.
The bad news is that it has become increasingly clear that we cannot rely on Libor in the long term. Libor is meant to measure banks’ short-term unsecured funding costs. But the reality is that bank funding markets have changed, and banks no longer take enough wholesale term deposits to form the basis for a robust transaction-based benchmark. As we have pointed out in the past, the result is that Libor is overly reliant on expert judgement rather than actual transactions. That situation is neither desirable nor sustainable. There is also a risk that panel banks might withdraw from Libor and precipitate its collapse, which raises obvious financial stability concerns. So there is a clear need for the authorities and market participants, across every sector, to come together, and transition to alternative benchmarks. 8  All speeches are available online at www.bankofengland.co.uk/speeches  8  Under the auspices of the FSB, authorities in the UK, US, Japan and Switzerland have worked with market participants to identify alternative benchmarks. In the UK, the market-led Working Group on Sterling Risk Free Rates recently confirmed SONIA as its preferred alternative to Sterling Libor. 12  Market participants in every sector and market that uses Libor now need to come together to identify and resolve issues, change business practices, and adopt alternative benchmarks. To support the next phase of this work, the Bank and FCA are today announcing that from January, the Sterling Risk Free Rate Working Group will have a new mandate and wider representation from across the market.