Bank of England took more relaxed line on Libor than Fed, emails show
INTERNATIONAL regulators exchanged ideas about how to improve the credibility of the Libor interbank borrowing mechanism in mid-2008, but the Bank of England took a more hands-off approach than US authorities, according to emails released on both sides of the Atlantic.
Tim Geithner, US treasury secretary, sent a memo to the Bank of England in May 2008 which recommended reforms to how the rate is set by a group of the world’s largest financial institutions.
At the time the memo was sent to Bank of England governor Sir Mervyn King, Mr Geithner was president of the Federal Reserve Bank of New York. His memo contained six suggestions for “enhancing the credibility” of the London Interbank Offered Rate (Libor).
Libor, used as the basis for the pricing of hundreds of trillions of dollars of financial instruments, had come under fire in the first flush of the financial crisis over suspicions it was not a fair reflection of banks’ funding costs.
More than 20 banks and other institutions remain embroiled in an international regulatory probe into manipulation of Libor. The chairman and chief executive of Barclays recently lost their jobs following the bank’s £290 million (€369 million) settlement with regulators over the affair.
Twelve global banks that have been linked to the Libor rate-rigging scandal face as much as $22 billion in penalties and damages, according to Morgan Stanley.
The analysis, which the authors admit is “crude”, assumes 11 more banks will be penalised for trying to manipulate the Libor. The calculation excludes the potential fallout from continuing US and EU cartel probes, which could result in multibillion-dollar fines.
In his email, Mr Geithner recommended to Sir Mervyn and a deputy governor, Paul Tucker, some key changes to the way the Libor was determined, including requiring bank auditors to attest to the accuracy of the submissions of their daily borrowing rates.
Libor is set by the British Bankers’ Association (BBA), an industry group, and is not formally overseen by the Bank of England.
Sir Mervyn passed on Mr Geithner’s suggestion to the BBA through Mr Tucker, according to email correspondence released by the bank, but it appears not to have taken a proactive role itself.
Mr Geithner’s recommendations were later incorporated into a BBA consultation exercise on overhauling Libor, carried out in June.
Sir Mervyn said in a four-line email reply to Mr Geithner that the recommendations “seem sensible to us”. – (Copyright The Financial Times Limited 2012)