Why Rigging Of the Bank Bill Swap Rate Hurts Everyone

by Dr. Andrew D. Schmulow

The Conversation, (2016), published electronically.

ANZ Bank’s alleged manipulation of the bank bill swap reference rate (BBSW) is Australia’s version of the LIBOR debacle.

The workings of BBSW, like LIBOR, make for a very complex story. BBSW is similar to LIBOR (London Interbank Offer Rate), in that it’s used to set rates on hundreds of trillions of dollars (yes, hundreds of trillions) worth of transactions, including interest rates on credit cards, student loans and mortgages.

Banks also use the swap rate to determine the cost of borrowing from one another. It is the primary interest rate benchmark in the Australian financial market, and in Australia in 2014-15, was a market worth some A$1.7 trillion. The Australian Securities and Investment Commission (ASIC) is alleging that by nudging rates, ANZ has been able to make illicit profits.

With LIBOR, evidence emerged that banks were behaving like a cartel, and the practice of rigging rates was very much one of business as usual, with senior management in on the deal. After the LIBOR rigging was uncovered in the US, Barclays CEO Bob Diamond, and Chairman Marcus Aguis both resigned.

The rigging by ANZ allegedly happened while former CEO Mike Smith was in charge. ASIC has already managed to impose penalties against Royal Bank of Scotland (A$1.6 million), UBS, and BNP Paribas (A$1 million) for BBSW manipulation. Although of course, these penalties are small change compared to the billions of dollars in fines imposed abroad.