Libor needs global effort to fix, says Bernanke

LIBOR IS “structurally flawed” and an international effort would be needed to restore the rate’s credibility as the benchmark for mortgages, derivatives and corporate lending around the world, Ben Bernanke told US congress yesterday.

In the Federal Reserve chairman’s first public testimony since Barclays was fined $460 million for attempting to rig the London interbank offered rate, Mr Bernanke said US central bankers became concerned about “problems” with Libor towards the end of 2007, when market rumours began to circulate that banks were understating the rates at which they could borrow.

“The Libor system is structurally flawed,” Mr Bernanke said.

“It is a major problem for our financial system and for the confidence in the financial system . . . we need to address it.”

He also suggested Libor’s future might be in doubt, telling the Senate banking committee: “I would like to see additional reforms to the Libor process, assuming that Libor will continue to be a benchmark for financial contracts.”

In April 2008, a Barclays employee told an analyst at the Federal Reserve Bank of New York that the UK bank was “lowballing” its Libor submissions to appear weaker than its peers.

Mr Bernanke said the New York Fed “responded very quickly” by briefing a host of US regulators on May 1st, 2008, and urging the Bank of England and the British Bankers’ Association, which sponsors the rate, to reform it. The BBA ultimately adopted only two of the Fed’s six suggestions.

“There was active effort to report to all the relevant policymakers and enforcement agencies the information that had been received,” Mr Bernanke told Congress.

He added the Fed did not suspect at the time bank traders were trying to manipulate Libor rates “for profit”, but did have evidence some were “possibly submitting low rates to avoid appearing weak”.

Shortly after the New York Fed briefing in May 2008, the US Commodity Futures Trading Commission launched an investigation, and Barclays eventually admitted to manipulating rates both for profit and to appear stronger in the market.

Mr Bernanke’s description of the US response contrasted with testimony earlier yesterday from Sir Mervyn King, governor of the Bank of England, who told a UK parliamentary hearing he had only learnt about “deliberate misrepresentation” of Libor rates this month.

“The first I knew of any alleged wrongdoing was when the reports came out two weeks ago,” he said.

Asked by MPs why the UK had “failed to spot” problems with a benchmark rate set in London, Sir Mervyn insisted the bank had done its job:

“There’s a world of difference between people saying they don’t know how to submit Libor because the market is dysfunctional and deliberate misrepresentation.”

At the same hearing, Paul Tucker, Sir Mervyn’s deputy, said Mr Geithner’s 2008 reform proposals did not “set alarm bells ringing”, despite the US call for “procedures designed to prevent accidental or deliberate misreporting”. – (Copyright The Financial Times Limited 2012)