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(Image from Pixabay)
(Image from Pixabay)

By now most people would have heard about the Competition Commission’s referral to the Competition Tribunal regarding the alleged currency manipulation by 17 banks. In particular, the Commission is accusing the named banks of colluding over the bid and offer prices for the USD/ZAR currency pair.

The Commission claims that this collusion goes at least as far back as 2007. However, according to the Commission’s spokesperson, it is difficult to determine the extent to which the price of the rand has been affected.

As could be expected, political parties and the public are calling for the banks’ heads on the chopping block; after all, few business sectors are as hated and demonized as banking.

As the Daily Maverick put it, “banks are not your friends” and have been “stealing South Africa”. According to EWN:

The African National Congress (ANC) says the findings by the commission have raised doubts about the capabilities, trust and independence of the country’s banks.

The Economic Freedom Fighters (EFF) says it will be writing to the South African Reserve Bank to immediately discontinue banking and operating licenses of the banks named.

The ANC says corruption in the private sector has been rampant for too long and says now is the time to diversify the financial sector, introduce new players and transform the industry.

Yet the one question nobody seems to be asking is: where were the regulators during all of this?

Why do we need financial regulation?

As its name suggests, one of the defining features of the financial services industry is that its products and services revolve entirely around money itself. Because of this, many argue for stringent regulation of the financial sector.

Some of the reasons offered for such regulation include improving market efficiency, reducing financial crime, maintaining confidence in the financial system, and protecting consumers and the public. Most importantly, the ‘need’ for regulation is almost always justified by claiming that regulation it is meant to be preventative.

But how effective is government regulation at fulfilling these goals? All things considered – including the magnitude of the ‘scandals’ that have managed to slip past regulation – it appears to be quite inept. Consider some of the events in recent years: sub-prime lending and false credit ratings in the US, the uncovering of banks ‘rigging’ LIBOR rates in the international markets, and now the alleged collusion around foreign exchange in South Africa.

Regulation should prevent precisely these sorts of events from occurring, but when such events do occur, punitive action is used as a substitute. Issuing fines and penalties post hoc is like drawing a chalk outline around a corpse – it doesn’t prevent what has already transpired.

Furthermore, the Commission’s statement indicates that the banks have been engaged in collusive activity for around a decade now. Insofar as such activity has been harmful, regulation has seemingly done nothing to prevent such harm in that duration.

Big picture: it’s the State’s mess

Here we get to the heart of the matter. The point of this article is not to claim that more or different regulation is needed – indeed, no matter how many laws or regulations are written, it seems that regulators may still miss major ‘problems’ in the market.

Firstly, in a free market, anybody would be able to trade currency pairs. However, as in most countries, a small group of companies has the legal privilege of dealing in foreign exchange. This has the effect of restricting the ability of others to enter the market and undermine their competitors’ collusion; in addition, with fewer permitted players in the currency markets, the logistics around coordinating currency manipulation become much simpler.

Secondly, some people have claimed that all South Africans have been affected by the alleged currency manipulation through its effect on the petrol price, as an example. But this can only be a problem if we have no option other than to trade in the manipulated currency. Taking a step back, it becomes clear that the underlying problem is not that currency could be relatively easily manipulated, but that we are compelled by law to use a certain currency.

Lastly, even with perfect regulation of the banking sector, we could never expect currency manipulation to go away. As one of my colleagues rightly points out, central banks exist to ‘manipulate’ the value of their currencies. The Reserve Bank does this on a daily basis through its transactions with other banks, and through the creation of new base money.

The price inflation that all South Africans experience, and which lowers the purchasing power of the rand, is not merely an unfortunate by-product of such activity – it’s a deliberate goal. Remember: the Reserve Bank targets annual consumer price inflation of 3-6%. One is therefore left wondering whether currency manipulation is bad per se, or whether it is only a problem when anyone other than the arms of the State engage in it.

Are the banks to blame?

Many South Africans are angry at the banks named in the Competition Commission’s statement. But for the most part, banks are merely operating in the environment that the State has carefully (or carelessly, depending on your perspective) crafted for them.

Fiat currency, fractional reserves, reduced competition, moral hazard, and implicit bailout guarantees are all products of rules set out by the State, and not the banks themselves. As such, the ongoing string of banking ‘scandals’ is likely far from over.

  • Harald Sitta

    Rather a “state’ scandal… Maybe the central banks are the problem…. or a currency not on gold or silver standard ????

  • Peter Wiles

    Currency manipulation is not the issue here – the report refers to collusion and price fixing. This practice harms those people who have used the forex services of those banks – they have essentially been played by being charged more than they should be. No-one is singling out banks like they’re martyrs – there were recently price-fixing scandals in construction too; this hasn’t inherently got to do with financial regulations but with business regulations. The report is alleging they are in contravention of the Competition Act, not the financial regulations. The point of this Act is to increase competition by preventing actions that reduce it.

    You mention there is not enough competition in the sector because of regulation, and this has lead to the collusion; even if there were more official forex traders there would be natural oligopolies in the sector because we need to trust our bankers more than we need to trust just about anyone, so we would rather deal with a big established brand than an unknown. Note: I do agree that more official traders would be a good thing, but I don’t think it would prevent natural oligopolies with the power to price-fix.

    I don’t believe regulators should be blamed for illegal activity (although there could always be improvements in prevention) – if a private company is placed in a position of privilege by being entrusted by the nation to do foreign exchange they should honour that trust and privilege they have been given and carry out their actions according to the laws of the land. We can have a rational discussion about whether the laws are helpful or not, or whether they’re pragmatic or not, whether they’re expedient or not, and thus how we can potentially decrease this type of behaviour systemically, but to argue that because you believe the laws are wrong we should disobey them as if we are playing a game is to create a law unto yourself.

    I’m in a sector where there are only a few reputable players in our area as a natural consequence of the specialised skills needed and the limited pool of work. If we met together and agreed on prices that we would charge our customers we could all get higher prices because we wouldn’t be undercutting one another; and it’s unlikely that government could find out, especially if we were careful. But that would be illegal, unethical and harmful to our customers, whether we are caught or not. That is not “playing the game”, it is criminal behaviour.

    • Nic Haussamer

      “Currency manipulation is not the issue here – the report refers to collusion and price fixing.”
      -> Fixing the price of a currency is de facto manipulation of that currency, even if such manipulation is not carried out by central banks (I understand that the term typically refers to that).

      “The report is alleging they are in contravention of the Competition Act, not the financial regulations. The point of this Act is to increase competition by preventing actions that reduce it.”
      -> My argument was not that they were in contravention of the financial regulations; rather, I said that it is precisely this sort of activity that is (ostensibly) monitored/under the purview of by financial regulators. In particular, one would expect the SARB to be monitoring currency trading.
      The point is: if regulation achieves what it sets out to do, then it shouldn’t be necessary to wait and hope for (eg) the Competition Commission to stumble upon such cases.

      “You mention there is not enough competition in the sector because of regulation, and this has lead to the collusion…”
      -> Note that I didn’t say fewer currency traders led to collusion per se, but that it makes the logistics around collusion much easier. As you note with regard to your sector, you choose not to collude.

      “I do agree that more official traders would be a good thing, but I don’t think it would prevent natural oligopolies with the power to price-fix.”
      -> In what way would more traders be beneficial, in that case?

      “I don’t believe regulators should be blamed for illegal activity…”
      “…to argue that because you believe the laws are wrong we should disobey them as if we are playing a game is to create a law unto yourself.”
      -> I never argued that anyone should choose to break laws in this instance (that said, though, it is equally dangerous to conflate laws/regulation and ethical behaviour – as the history of this country clearly demonstrates). In addition, I never claimed that the laws were wrong – just that many of them are ineffective or counterproductive. Whether or not they are wrong is for the reader to decide; I merely outlined their consequences.
      -> The whole point of this article is to demonstrate that this sort of illegal activity, and the (claimed) harms caused by it are largely the product of the environment cultivated by our laws and regulations – that is to say, the existing laws and regulations facilitate the conditions that make it possible both for 1) this collusion to take place without being hampered by the rest of the market, and 2) for all South Africans to be affected (if such collusion actually had a significant effect). This is also why I conclude by saying, “As such, the ongoing string of banking ‘scandals’ is likely far from over.”

      “That is not “playing the game”, it is criminal behaviour.”
      -> You’ll notice that I said “For the most part, …” in stating that banks are “playing the game that the State has carefully … crafted for them.” Certainly, acting illegally in this manner is prohibited by law, but going back to the points above (and in the article), the features of the financial sector that line up to allow this collusion to take place are – as I’ve stated – a product of the laws/regulations, which in turn define the “game”.

    • Nic Haussamer

      “Currency manipulation is not the issue here – the report refers to collusion and price fixing.”

      -> Fixing the price of a currency is de facto manipulation of that currency, even if such manipulation is not carried out by central banks (I understand that the term typically refers to that).

      “The report is alleging they are in contravention of the Competition Act, not the financial regulations. The point of this Act is to increase competition by preventing actions that reduce it.”

      -> My argument was not that they were in contravention of the financial regulations; rather, I said that it is precisely this sort of activity that is (ostensibly) monitored/under the purview of by financial regulators. In particular, one would expect the SARB to be monitoring currency trading.

      The point is: if regulation achieves what it sets out to do, then it shouldn’t be necessary to wait and hope for (eg) the Competition Commission to stumble upon such cases.

      “You mention there is not enough competition in the sector because of regulation, and this has lead to the collusion…”

      -> Note that I didn’t say fewer currency traders led to collusion per se, but that it makes the logistics around collusion much easier. As you note with regard to your sector, you choose not to collude.

      “I do agree that more official traders would be a good thing, but I don’t think it would prevent natural oligopolies with the power to price-fix.”

      -> In what way would more traders be beneficial, in that case?

      “I don’t believe regulators should be blamed for illegal activity…”

      “…to argue that because you believe the laws are wrong we should disobey them as if we are playing a game is to create a law unto yourself.”

      -> I *never* argued that anyone should choose to break laws in this instance (that said, though, it is equally dangerous to conflate laws/regulation and ethical behaviour – as the history of this country clearly demonstrates). In addition, I never claimed that the laws were wrong – just that many of them are ineffective or counterproductive. Whether or not they are wrong is for the reader to decide; I merely outlined their consequences.

      -> The whole point of this article is to demonstrate that this sort of illegal activity, and the (claimed) harms caused by it are largely the product of the environment cultivated by our laws and regulations – that is to say, the existing laws and regulations facilitate the conditions that make it possible both for 1) this collusion to take place without being hampered by the rest of the market, and 2) for all South Africans to be affected (if such collusion actually had a significant effect). This is also why I conclude by saying, “As such, the ongoing string of banking ‘scandals’ is likely far from over.”

      “That is not “playing the game”, it is criminal behaviour.”

      -> You’ll notice that I said “*For the most part,* …” in stating that banks are “playing the game that the State has carefully … crafted for them.” Certainly, acting illegally in this manner is prohibited by law, but going back to the points above (and in the article), the features of the financial sector that line up to allow this collusion to take place are – as I’ve stated – a product of the laws/regulations, which in turn define the “game”.