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
    0

    Comment number 212.

    Comrade@209
    No rest for the thinking!

    I was imagining, 'victimless crime', life-style temptation, or worse, practising to deceive, the web so tangles as we weave, working for the team, the GDP, the state, The People: even, terrible thought, that really, Number One might be right!

    Not all can have conscience (1-3%), but might be 'trained to emulate'

    For most, just stop offering 'protection'!

  • rate this
    0

    Comment number 211.

    209.AfA

    " Fooling others? And selves?"

    Fool me once shame on you. Fool myself twice shame on me!

    If we can fool ourselves, where does that leave "Rule of Conscience"?

    Sometimes outside intervention is the only correction possible.

  • rate this
    0

    Comment number 210.

    There can be no shame in trying to save a duff bank or a duff company.
    The real shame is down to the people who think it is OK to spend public money trying to save private investors from a very bad investment.
    Bit like,heads they win.Tails we lose.
    Or,put another way,
    People who have nothing,come to the rescue of people who can afford a flutter on the Stock Exchange.

  • rate this
    0

    Comment number 209.

    ComradeOgilvy @208
    "What we don't know"
    We can guess, not so smart

    Fooling others? And selves?

    Charity I fear may not cover all
    If like 'Charlie' Richardson
    Judge made 'ashamed'
    Living in same country

    We all need rescue, by ourselves
    Agreeing to Rule of Conscience

    For the record: Equal Democracy
    (apologies to those who know)

  • rate this
    +1

    Comment number 208.

    206.AfA

    Actual transactions stopped when banks no longer trusted one another. Thus Wheatley's assessment that it is repairable is plain wrong and so much therefore remains uncertain.

    His honest assessment - of the market, by the market, for the market - is more than a clue... As this phoenix died under the weight of regulation, a new one will rise.

    What we don't know won't hurt us, eh?

  • rate this
    +2

    Comment number 207.

    "@BBCGavinHewitt via Twitter

    In Spain the latest stress test of the banks concludes they need € 59.3 billion in capital. In line with expectations #Spain"

    EUp: What they "need" is not what we need. We need for them to go bankrupt so that the poor are not bailing out the rich.

  • rate this
    +1

    Comment number 206.

    ComradeOgilvy @204
    As ever perceptive
    Not to convince

    Alternation of generations
    The circle a spiral, perhapos
    Glimpses of 'mechanism'

    Their end in pipe & slippers
    For the survivors, perhaps

    More than a clue
    But sorry anyway

    Future rates will be transactional
    So much certain
    But next stop?

    One for Robert Peston to fathom
    Eddie Mair permitting

  • rate this
    +3

    Comment number 205.

    " so much of what transpired seems to belong to another universe."

    - er unfortunately not Robert. It happened right here on earth, and the real people, the victims got stuck with the bill!

    Grotesque!

  • rate this
    0

    Comment number 204.

    203.AfA

    " lost but then found"

    Not yet convinced.

    'Boom and bust' = 'Circle of life'?

    Not convinced of that either.

  • rate this
    +1

    Comment number 203.

    Comrade @201
    In 'actual transactions'
    Martin Wheatley's faith

    "Blind by choice of those we cannot know"

    Let it be told, "Don't be Told":

    From the mouths of the lost but then found
    Memory outlived of what might have been

    The past has two trajectories, inter-twined
    Though distancing, quantum leaps ever on

    Death, like a thief, has no long triumph
    Darkness only the cradle of life re-born

    Topic A

  • rate this
    +2

    Comment number 202.

    The final humiliation would be for Barclays to be forcibly closed down, and why not?

    Barclays has been fined millions for wrong investment advice, failing to protect and ring-fence client money,failing to provide accurate transaction reports, rigging interest rates and now there is a criminal investigation at Barclays

    A company with this track record would have been closed down

  • rate this
    +2

    Comment number 201.

    Oh God save history
    God save your mad parade
    Oh Lord God have mercy
    All crimes are paid

    When there's no future
    How can there be sin
    We're the flowers in the dustbin
    We're the poison in your human machine
    We're the future, your future

  • Comment number 200.

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

  • Comment number 199.

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

  • Comment number 198.

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

  • rate this
    +1

    Comment number 197.

    coram-populo @187
    "challenged"?

    On Equal Democracy?
    Seriously?
    When, ever?

    Perhaps Martin Wheatley can persuade, of "a conflict of interest that precludes strong and credible governance"

    Many 'versions' seem revelatory! But then the whole world is that, in proportion to faculties & their develoment

    Choice of LIBOR-base the least of banking worries, but best made well upstream of Niagara

  • rate this
    +5

    Comment number 196.

    @194.CL
    "The worst bit may be that bankers and their type run most of our media"

    If you ever have the time I recommend watching the Money Masters by Bill Still, if you haven't already seen it, or one of his follow up documentaries (The Secret of Oz). It appears he may be slowly succumbing to the dark side of the force though:

    http://still2012.com/

  • Comment number 195.

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

  • Comment number 194.

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

  • rate this
    +11

    Comment number 193.

    There is still far more to come from the libor mess.
    There are large numbers of potential lawsuits against the banks.
    http://www.zerohedge.com/news/here-come-libor-liability-estimates

    I still hold that separation of savings from investment is a necessity.
    In the highly probable event of further banking crisis the whole of the ATM, payment and wages system is at ransom to the banks errors.

 

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