The future of Libor to be scrutinised by central bankers

19 July 2012

Discussion will start in September about how to reform Libor, the interbank lending rate that sets the basis for consumer and business loan rates, following the Libor manipulation scandal which has rocked the sector. Central bankers and regulators will hold talks on 9 September this year about whether to reform the London interbank offered rate (Libor) and may decide that it has been damaged beyond repair as a global benchmark and should therefore be scrapped.

Bank of England (BoE) governor Mervyn King has written to fellow central bankers admitting that it is “very clear that radical reforms of the Libor system are needed”. He is reported to have added the Libor issue to the agenda of the economic consultative committee of global central bankers that will meet in Basel, Switzerland in September. The discussions will continue there the following week at the international Financial Stability Board’s (FSB) steering committee, which is chaired by global financial regulator and Bank of Canada governor, Mark Carney, and includes other financial regulators.

Carney and US Federal Reserve chairman Ben Bernanke, who told US regulators just this week he’d alerted King to the problem years ago, outlined possible alternatives to Libor on 18 July. The furore follows the revelations that Barclays and up to 20 other banks manipulated the Libor rate leading up to and beyond the 2008 financial crisis. Barclays were fined $425.5 million for the transgression.

“There are different alternatives if Libor cannot be fixed,” Carney said at a news conference in Ottawa, Canada. “If it's structurally flawed and can’t be fixed, which is a possibility, there may need to be different types of approaches, and we need to think that through.”

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As further fines will no doubt be handed out to other banks under investigation for Libor manipulation in the coming months the clamour to 'do something' about Libor is likely to grow. Barclays Bank, which lost its chief executive Bob Diamond over the affair, cooperated with the US and UK regulators back in March 2012 at the investigation gathered pace and received a reduction in their $425.5 million fine for doing so.

Other leading multimational banks under investigation will probably be hearing from the regulators soon, which will no doubt ramp up public and political calls for reform of the Libor setting mechanism. The British Bankers' Association (BBA), which collates the Libor rates using Thomson Reuters technology, has already disavowed any wish to continue with its present role.

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