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 132.

    131. John M

    Don't waste your time, John M... you're perceived as nothing more than a pleb. The lady has demonstrated that she is a different class of person - a moral icon.

    Ahhh!... the perfume of suckers taken for a ride.


  • rate this

    Comment number 131.

    Angela Knight...where are you now, in the BBA's hour of need?

    Where is your reassuring nay-saying of every criticism of this elitist, corrupt old-boys club?

    Oh, you are at Tullet Prebon now? And at Brewin Dolphin? And you still have your CBE?

    Just rewards for a job well done ;o)

  • Comment number 130.

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

  • Comment number 129.

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

  • rate this

    Comment number 128.

    No Robert it is not the final humiliation for the banks, that will never happen and justice, ie. the successful prosecution of those involved in fraud and theft on an industrial scale will never take place. Why not? because the banking "elite" have too many friends in low places intnet in covering their own rear ends and will work hard to rubbish any possible prosecution cases.

  • rate this

    Comment number 127.

    Robbing banks is a crime. When banks do the robbing it seems that they can get away with it.

    Let's hope that the top echelons will get full prosecution for robbing customers, clients and country! With the corresponding sentences!

  • rate this

    Comment number 126.

    I think this story has more legs, once the depth of the libor swaps manipulation is examined..

    If the swaps are found to linked to pension funds then the likely bill for banks could run into many, many billions of pounds..

    Which then raises the spector of further bail outs for banks..

    Libor regulation was muted years ago..

    CoL and our politico`s failed us...absolutely..

  • rate this

    Comment number 125.

    Ok the bigger question is, how many other freewheeling, unregulated practices take place that have yet to be uncovered? How about pushing up credit card interest rates when people are struggling to pay? Or maybe the ad-hoc application of unreasonable bank charges?

    Still a way to go I think...

  • rate this

    Comment number 124.

    wot no criminal charges against the organ Ms A Knight and the cronies... one step short of justice yet again.

  • rate this

    Comment number 123.

    Should banks have ever been trusted. At the end of the day they are just self-interested Companies interested in making money for their shareholders. Now this "scam" has been uncovered they will just have to find another way to bankrupt countries and the society they live in. I don't have a problem with capitalism - but it requires a moral compass and integrity to work effectively.

  • rate this

    Comment number 122.

    Again correct me if I'm wrong but isnt the point of LIBOR to have a base cost of money to the bank so we can judge the margin banks are taking - as they dont source their capital from interbank any more whats the point of it ? Perhaps they never did - surely a banker can educate me/us ?

  • rate this

    Comment number 121.

    Looks like it's time to have little Eurozone bashing to divert attention away from the revelations emerging from our own financial sector sector cesspit.
    I'll start the ball rolling, I see Spain need yet another bail out this week.

  • rate this

    Comment number 120.

    On a technical point is there sufficient interbank lending going on make Libor statistically significant ?

  • rate this

    Comment number 119.

    Is this the same Hogg that was in Downing Street with the dynamic John Major and wife of the former Tory MP,and moat cleaning parliamentary expence claimant?
    What a stupid appointment.
    The criminals in the 'City' will be dancing with joy.

  • rate this

    Comment number 118.

    how about ROBS panel.....
    regulation of bankins standards panel
    except this implies that the banks are regulated, when I am not sure this is happening even now.
    After the panel reports, then the civil prosecutions could begin.

  • rate this

    Comment number 117.

    LIBOR is an American rate so they were disadvantaged by this scam.
    I look forward to loads of extraditions of the UK people responsible.
    I thought that even in the UK, comitting fraud for pecunary gain was a crime!
    It just shews how helpless the ordinary man in the street is to fight the corrupt cabal of politicians and bankers.

  • Comment number 116.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 115.

    After the absolute sterling work done by the Hillsborough Independent Panel, lets have a similar panel to investigate the UK banks. Of course, human life was not thrown away, but the consequences of the misbehaviour of the banking sector have been serious. The data gathering women on this panel and the Bishop restored my faith in public service...any of them for BOE governor.

  • rate this

    Comment number 114.

    96. BJK
    "The word 'humiliation' tells us where you are coming from on this, Robert,but humiliating people rarely has good results-some suggest that Hitler's driving force was Germany's humiliation at the hands of the Allies after WWI. "

    Others would say it was appeasement. Lack of will to withstand the demands made. Post WW2 the humiliation was completed by the division of Germany.

  • Comment number 113.

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


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