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, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 72.

    The end of deregulation and a new dawn for british manufacturing in the offing ...

    The Iron Lady's legacy looks to be over .....

  • rate this

    Comment number 71.

    I doubt there will ever be any prosecutions over any of the banking scandals, the judges won't be jailing the people that helped the judges become even richer.

    Revolution is inevitable as the gap between rich and poor gets wider & wider. This week a judge states 'expect to be shot' if you burgle a country home.

    Already they are looking to change the law to defend all they stole.

  • rate this

    Comment number 70.

    57.Pete Powell
    there was 'talk' about separating High Street Banking from Investment Banking.

    correct loads of talk, there has been enough time for the vested interests to convince politicians its not necessary, and an internal wall will be more than sufficient.

    None of our major parties will object too vociferously just for show . We have no say.

    Good cop bad cop routine .

  • rate this

    Comment number 69.

    #65 WolfiePeters
    In stead of listing those we can't trust, here's a list of those we can:

    end of list

    I trust myself to continue being as stupid as I have been for 64 years and believing that somehow things will get better

  • Comment number 68.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 67.

    It is a truism to say "for every lender there is a borrower". It is also true that the two banks will see LIBOR or LIBID from opposite ends of the telescope. If the "Offered" and "Bid" Rates are quoted slightly adjusted to match the positions of the borrower and lender, the result is surely that the net effect is to cancel out the exaggerations of the two banks. Where is the problem?

  • rate this

    Comment number 66.

    This is tantamount to accusing bankers of illeagal behaviour. Hopefully charges will follow the accusations, and convictions follow the charges.
    Then some of the money could be retrieved as the spoils of criminal activity.

  • rate this

    Comment number 65.

    In stead of listing those we can't trust, here's a list of those we can:

    end of list

  • rate this

    Comment number 64.

    "Best regulation"?

    After-fact market discipline?

    OK for 'ordinary competition', relative failure & honest mistakes

    NOT for endemic corruption, the driving of commission & omission that is 'an inevitable tendency', Lord Acton kindly tells, as soon as WE are confronted by threat and / or opportunity

    However 'well intentioned', WE all need Equal Partnership

    Secure Equal Income-Shares

  • rate this

    Comment number 63.

    .If only we were under Elizabeth I not II, the Tower of London (ironic how close it is to the City of London) would be overflowing by now.A report was produced illustrating where the fault lay ay Hillsborough. 23 years of persistence but all they have done now is moved to the next level, how long before any prosecutions ? The banking fiasco is going along the same lines

  • rate this

    Comment number 62.

    Post No.9

    Self regulation will never work when money is involved. You can add MPs, doctors and even The Catholic Church to the list that have failed to regulate themselves.
    A pretty feeble attempt has been made so far to regulate. Changes are needed in BOE, MPC, and FSA also. SFO just as well be disbanded if it can't bring anyone to justice!

  • rate this

    Comment number 61.

    Regulators are always behind the curve. Best form of regulation is moral hazard. No tax payer takes over banks bad debt or decision making. How do we know banks are too big to fail? What about central banks manipulation of interest rates punishing savers and dare one say the prudent? Iceland is the country that has shown some leadership in this mess.

  • rate this

    Comment number 60.

    Saving Finance?

    "Power tends to corrupt, & absolute power corrupts absolutely"

    Implicitly, do you not think, 'power' for self-enrichment above others?

    How then, Bluesberry, do we 'avoid' need for Income-Share Equality?

    Is there 'a necessary' or 'an acceptable' or 'an ideal' level of corruption?

    Are we content to enjoy rage at inevitable scandal & ruin, even war?

    Could we settle

  • Comment number 59.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 58.

    Trust - I have a great deal of difficulty in trusting people 70% of the time as I am sure others do too. It's either 100% or zero.
    If organisations cannot be trusted once then that they can never be trusted.
    No area of banking and finance should be unregulated and with criminal law backing that regulation.
    Upside megabuck salaries - step our of line 5 years in jail

  • rate this

    Comment number 57.

    Some while ago, if my memory serves me correctly, there was 'talk' about separating High Street Banking from Investment Banking. Has this gone by the board now, or are we still going to be ruled by plutocrats in Lombard Street, allowing them to borrow our money to shore up their inadequacies?
    A full documentary illustrating the banking fiasco of the 21st Century in the UK is long, long overdue!

  • rate this

    Comment number 56.

    48. BluesBerry
    Another Lord Acton quote "The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks."

  • rate this

    Comment number 55.

    If the Government wants to send a pleb to prison they find some obscure law, somewhere, while bankers who openly commit massive fraud walk away scot free with millions stolen from our pension money. Our government will do nothing but the Americans are Cameron tries to change the laws on extradition when he sees some of his old etonian chums lined up to go.

  • rate this

    Comment number 54.

    I would suggest what the general public outside of the 'city' want to see happen is a repatriation of all those false profits the bankers took in excessive bonuses. That is the only way you will correct the problems in the 'city' that caused the mess, they will find getarounds for new regulation, the only thing that will temper their actions is the real propsect of loosing wealth.

  • rate this

    Comment number 53.

    Very good to see you back Robert.


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