Understanding the LIBOR Scandal: The Historical, the Ethical, and the Technological

Abstract

We examine the conceptions of financial regulation through the lens of the 2012 LIBOR scandal. The narrative of the scandal addresses the debate surrounding the public versus private view of banking regulation. We propose a theoretical model that conceptualizes the interplay of three natures—human, structural, and technological—the overlaps of which are elaborated as regulatory capture, speculative behavior, and financial system design. Evident in these areas is a theory of banking regulation that we advance: that regulation should aim to curb speculation that arises from technology used by humans, recognize the capitalistic and interest-calculating nature of the financial industry and the structural constraints on the existing financial system, and design incentive structures that engage key players to serving the policies.

Keywords: banking regulation, financial innovation, financial system, regulatory capture

JEL Classification: N20, N40