08 Sep Call for transparency as King admits Libor should be replaced
Sir Mervyn King, Governor of the Bank of England, admits that Libor should be scrapped
Scottish news: Call for transparency as King admits Libor should be replaced
by Jamie Mann
Libor has not worked since the onset of the financial crisis and should be replaced, Sir Mervyn King, Governor of the Bank of England (BoE) has insisted.
Mr King has called for Libor (London Interbank Offered Rate) to be replaced as evidence of Libor-rigging among UK banks has piled-up over the past few months. The rate-rigging scandal has led to increased interest payments on mortgages and loans for millions of people in a market worth hundreds of trillions of dollars globally.
Commenting on the Libor scandal, Mr King said: “What’s become apparent is there is no such thing as the interbank borrowing rate…The dominant feature in setting interbank borrowing rates is now the credit risk associated with the potential failure of a bank, and that varies from bank to bank.
“So the idea of having a panel to sort out the interbank rate no longer makes sense.”
The latest development comes as Japan’s biggest bank Tokyo-Mitsubishi UFJ suspended a London-based trader over Libor-rigging; the third trader suspended by the bank over allegations of involvement in the scandal.
Award-winning financial commentator Ian Fraser questioned the length of time taken by the BoE to acknowledge that Libor was open to manipulation and called for more transparency and accountability should a new process be introduced.
Mr Fraser told Scottish Times: “I welcome King’s admission. But I wonder why it has taken the Bank of England 26 years to recognise that the system introduced in 1986 was open to abuse and had become hopelessly corrupt over the past two decades.
“King and his successor must now take a more hands on role to ensure that whatever replaces Libor has some grounding in reality. It must be based on actual, verifiable transactions.”
Support for Libor from the BoE chief has diminished after allegations of systemic corruption in the banking industry spread in recent weeks.There has also been allegations that the Bank of England was warned about Libor rigging in 2007-8.
However, rate manipulation is believed to have been committed by Barclays from as early as 2005 in the dollar market, according to the documents reviewed by Reuters. By August of the same year, traders were calling other major global banks to tailor their rates at a trading advantage to Barclays.
The giant UK high-street bank has already received a £290mn fine for Libor-rigging whilst other banks are currently under investigation. The Royal Bank of Scotland confirmed on Friday that the bank has dismissed staff for suspicion of rate-rigging.
RBS Chief Executive Stephen Hester insisted that the firm was cooperating with the government and investigators, but implied that the problem was isolated, calling the rigging “wrongdoing by individuals”.
Rate manipulation had been allegedly instructed by bank executives, which suggests that Libor rigging was not merely the actions of ‘rogue traders’.
Jerry del Missier, former CEO at Barclays, told the Treasury Select Committee that former Barclays chief, Bob Diamond, made it clear to him in October 2008 to “get our Libor rates down”.
The Daily Telegraph was similarly informed by a salesman from an unidentified major UK bank that “everyone knew” and “everyone was doing it”.
The corrupt practices in the institution allegedly involved around 30 people, including managers and treasurers, who plotted rate rigging in early 2008.
So far, only individual traders are being held accountable whilst institutions seem set to escape the scandal with fines only.
In an agreement between the US Department of Justice and Barclays, the former promised that it “will not prosecute Barclays Bank PLC” for any crimes including Libor and Euribor.
In January, RBS accused their head of short-term interest rate trading for the Japanese yen, Tan Chi Min, of attempting to manipulate trading rates between 2007 and 2011 to positively affect his own trading interests.
Tan successfully sued Scotland’s largest bank for wrongful dismissal in December 2011.