Fine and punishment

17 Jun 2013 By Peter Thal Larsen

Singapore has come up with a creative way of penalising rate-rigging banks. Regulators are forcing lenders implicated in manipulating the city-state’s borrowing and currency rates to set aside up to S$12 billion ($9.6 billion) in extra central bank reserves. With rates low, however, the costs will be much lower than recent mega-fines.

An investigation by the Monetary Authority of Singapore (MAS) concluded a staggering 133 traders tried to influence rates to their advantage. However, the regulator didn’t find conclusive evidence that they had succeeded. And as attempted manipulation is not explicitly forbidden by existing rules, it could not impose fines on the misbehaving banks.

Nevertheless, the MAS has found a way to extract a pound of flesh. It is demanding that 19 banks deposit extra reserves with the MAS for a year, without receiving interest. That will hit their bottom lines, much like a fine.

Low interest rates mean the financial damage looks manageable, however. Assume the banks borrow the extra funds at Singapore’s one-year interbank rate of 56 basis points: the combined cost for the 19 banks would be between S$47 million and S$67 million.

Alternatively, consider what the banks could have earned if they had lent out the money. At the same net interest margin of 164 basis points achieved by Singapore’s largest banks in the first quarter, the combined income lost would be between S$139 million and S$197 million. Contrast that with the $1.5 billion UBS alone paid for manipulating Libor.

The lower penalties reflect the fact that Singapore’s interest rate and currency markets are much smaller than Libor, which is a reference for trillions of dollars of loans and derivatives. And the damage may still be meaningful when compared with banks’ Singaporean trading businesses.

Even so, the approach is unlikely to catch on. Regulators in moribund Western economies will be reluctant to take an approach that would restrict the availability of new credit to the economy. Meanwhile, the MAS is proposing new rules that will give it the ability to whack future miscreants with criminal and civil charges. While creative, Singapore’s fines may be a one-off.


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