Libor: The final humiliation for banks

city of London The end of self-regulation for the City?

If ever there was a symbol that regulators and government no longer trust banks to do the right thing, it is today's formal announcement that the British Bankers' Association will no longer oversee the setting of Libor.

In the words of Martin Wheatley's review of how this important benchmark of interest rates is set, "the BBA acts as the lobby organisation for the same submitting banks that they nominally oversee, creating a conflict of interest that precludes strong and credible governance".

In other words, there is no longer any nook or cranny in the City of London where self-regulation can be trusted to work.

Which I suppose is not a great surprise, after all those revelations about how bankers at Barclays tried to rig Libor rates to generate unfair profits on deals linked to their respective bonuses - and in advance of similar revelations that will be forthcoming soon about bankers' Libor conduct at other banks, including Royal Bank of Scotland.

In place of the BBA - which, it should be remembered, actually created Libor in 1986 and has administered it throughout its history - there will be a data provider (an organisation such as Bloomberg or Reuters) or a regulated exchange.

This new administrator of Libor will be selected by a committee to be chaired by the former 3i chair Baroness Hogg and which will be set up by the Treasury and the Financial Services Authority.

All that said, some would say it is a bit odd (ahem) that the Financial Services Authority and the Bank of England did not take evasive action to grip the Libor-setting process back in 2008, when problems in the market first became conspicuous. And, as it happens, the BBA asked them for help at the time but was rebuffed.

Or to put it another way, no one - banks, BBA or regulators - emerges with any credit from this mess.

Why does any of this matter? Well the Libor rates are supposed to indicate the cost of borrowing for banks. and they are in turn used for the pricing of financial transactions worth more than $300 trillion (yes, trillion) and even have an impact on the mortgage rates we pay.

So, for confidence that the City of London is doing its job properly, it is important that Libor is set in a fair, robust and reliable way.

Wheatley has two other important reforms, apart from turfing out the BBA.

First, a load of rates that are barely used, in less heavily traded currencies (the Aussie dollar, the NZ dollar, the Canadian dollar, Swedish krona and Danish krona) and in funny maturities will be axed.

Also the interest rates bankers submit to the panels that calculate the benchmarks will be based on actual transactions, rather than the historic practice of a banker sticking his wet finger up in the air and wondering which way the financial wind is blowing.

Second, the whole Libor-setting process will be firmly brought inside the regulatory net, so that the procedures followed by banks in submitting rates for the Libor calculations will be vetted by regulators and attempting to rig the rate will become an unambiguously illegal action.

Some may say that it is weird that such an important cog in the global financial machine was allowed to free-wheel, with no oversight or maintenance by regulators, for so long. But then when we look back on the great faith everyone placed in banks and financial markets before the great crash of 2007-8, so much of what transpired seems to belong to another universe.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 12.

    It is clear. The Thatcher big bang small government philosophy put pressure on every single public official and regulator everywhere to stop looking at what was going on. But it is human nature...when the cats away (not looking) the mice will play (steal all our cheese). And the US Tea Party and Tory right wing I suspect would still like to get us all back to these good old days...

  • rate this

    Comment number 11.

    Not the final humiliation Robert, we still have the biggest fraud in the history of mankind to be lanced, namely securitisation. The banks built their own £9 trillion by selling debts into pension funds through companies (special purpose vehicles) set up by themselves. Before the ink was dry on a mortgage they had sold it off at 110%, valuing the debt using 'net present value' calculations.

  • rate this

    Comment number 10.

    It doesn't surprise me that the BBA presided over this mess, having some familiarity with the incompetent people who work in that organization. The Public want a full public inquiry and criminal prosecutions. And as a former labour supporter I have no hesitation in calling for prosecutions against Ed Balls, GB and Mervyn King , only then will the public start to have any confidence in the system

  • rate this

    Comment number 9.

    Will be interesting to see the detail and hope the process is totally transparent. Transaction rates when there may be little or no transactions?

    Related but different - can anyone point ANY successful process of profession self regulation e,g, police, social services, press, wider media?

  • rate this

    Comment number 8.

    Drove past the Labour offices in my local town a couple of weeks back. They had a poster, pinched from RBS, advertising "Our lowest fixed rates yet". An amusing take on a this situation. The poster is a 2007 poster, the Libor rate scandal blew in 2008. The FSA and the Labour government did nothing. Highlights just what a bunch of muppets were in control. Maybe Balls can explain why?

  • rate this

    Comment number 7.

    Individuals and Banks committed fraud with the knowledge of the overseers.

    None of them are going to go to jail....thats all we need to know.

    All in it together..........yeah right.

  • rate this

    Comment number 6.

    At least now LIBOR will be based on realities rather than estimates. Unlike most other financial instruments through which City traders 'earn' their bonuses, which are still created on opinions and predictions rather than genuine physical assets.

    How much more of the world of these financial wizards is as tenuous as the South Sea Bubble?

    But don't expect Osborne or any Tory to burst it.

  • rate this

    Comment number 5.

    "the interest rates bankers submit to the panels that calculate the benchmarks will be based on actual transactions"

    Good idea. Let's start using real figures. Mark to market prices.

    " important cog in the global financial machine was allowed to free-wheel, with no oversight or maintenance by regulators, for so long."

    Thought banks were over-regulated?

    What are "funny maturities"?

  • rate this

    Comment number 4.

    Robert, please study your economic history. most the criticisms of the uk banking system have been made since 1930s, only the vested interest by the ruling class has never done anything about the problems. banks need much greater regulation. For too long the Chairmen of the big uk banks have being running UK Treasury.

  • rate this

    Comment number 3.

    I will be interested in seeing what comes from the other banks and how deep it all goes.

    On another note - nice to see you back Robert I hope you are doing well.

  • rate this

    Comment number 2.

    The moment that Mr Wheatley replied to a question on Radio 4's Today programme this morning that city folk who committed fraud were not guilty of theft but 'inappropriate behaviour' was the moment we can all surely see through all of this latest twaddle. Oh,and is there any doubt that without USA action, it would have taken our Old Boy city network another 5 years to get around to doing anything?

  • rate this

    Comment number 1.

    Bang to rights -it a fair cop guy -those are to ONLY acceptable words to hear from bankers.

    They became corrupt. They fiddled LIBOR to rig their bonuses which robbed their customers and shareholders.

    As they were fiddling rates down to make themselves look better than they were they are also responsible for the consequences - contribution to stoking the bubble that led to the crash!



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