BBA asks UK government to regulate Libor as scandal continues

29 June 2012

The British Bankers’ Association (BBA) has called on the UK government to review future regulation of the London Interbank Offered Rate (Libor), following the US$452.5m fine imposed on Barclays for the manipulation of the benchmark interest rate between 2005 and 2009 and the on-going investigation into other banks, including RBS, UBS, HSBC, Citigroup and others.

The BBA trade association, which collates Libor, launched its own review in March when regulators first began their investigation, and said in a statement: “The BBA is shocked by (Wednesday’s) reports about Libor. As part of our review we will now be asking the authorities to consider in what manner the Libor setting mechanism should be regulated in the future.”

The BBA originally developed Libor in 1986, to meet the London market’s demand for a reliable benchmark. It then went global, setting the base rate for treasurers’ derivative hedges and consumer borrowings.

As the interbank lending rate is still overseen by the BBA, although it is set using Thomson Reuters network on a daily basis, Libor acts as the benchmark measure for the rates at which major banks borrow from one another, and others from them. As such, it sets the pricing applicable for derivatives deals, many commercial and some residential mortgages, as well as a growing number of commercial loans by banks to corporates – not to mention car loans, savings rates and a myriad of other consumer rates.

Barclays hammered amid calls for prosecutions

Separately, the UK Chancellor of the Exchequer, George Osborne, said that the government will consider widening the criminal market abuse regime to include over-the-counter (OTC) derivatives and manipulation of Libor, amid calls for the errant bankers to be jailed.

Osborne added that the exposed malpractices were “a shocking indictment of the culture at banks like Barclays,” but it was likely that other banks would also be found to have been in breach of their duties by permitting traders to distort basic data relating to Libor and an investigation would “concern a number of institutions based both in the UK and overseas.”

In his speech to the House of Commons yesterday, Osborne also admitted that the powers of the UK financial sector regulator, the Financial Services Authority (FSA) did not, however, extend to “criminal sanctions for the regulation of Libor” and suggested that while the FSA could force senior managers found guilty to resign, its powers fell short of bringing criminal charges.

Barclays license to operate as a bank could be revoked but seeing as all the other banks are under investigation as well, that wouldn’t leave much of a banking sector.

Meanwhile, the pressure on Bob Diamond, group chief executive of Barclays and the man in charge of the Barclays Capital investment arm of the group at the time of the misdemeanours, to resign is escalating. In order to save him, however, speculation is rife that the chairman of Barclays, Marcus Agius, coincidentally the honorary chairman of the BBA, will be sacrificed instead.

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