The British Bankers Association has voted to cede its role in the setting of Libor, the benchmark of borrowing costs which lay at the centre of the Barclays rate-fixing scandal.
The BBA, the professional body of the banking industry in Britain, voted to cede its role last week, at the request of officials who, according to the Financial Times (£) plan to announce a replacement process on Friday.
The managing director of the Financial Services Authority, Martin Wheatley, is chairing the review of the reference rates, and the BBA has said in a statement that it:
Seeks to work with the Wheatley review team as they complete their consultation on the future of Libor. If Mr Wheatley’s recommendations include a change of responsibility for Libor, the BBA will support that.
While the BBA has ceded its role, the organisation which sets Libor’s sibling rate, Euribor, has no such plans. Even though Euribor was also subject to attempted manipulation by Barclays, the European Banking Federation, which controls it, told the FT that:
There is no comparison with the Libor case. Our stakeholders are national associations and not the banks themselves, this prevents any potential conflict of interest in hosting the governance of benchmarks.
The big question remaining to be answered is what recommendations Wheatley will offer. There have been no shortage of inventive solutions as to how to set Libor in a non-manipulable way.
In July, Frank Portnoy suggested what remains the most ingenious possibility:
The teeth of the new regulation would be a rule requiring the bank that submitted the lowest Libor estimate to lend a significant amount of money, say $1bn, to the Libor Trust at its submitted low rate. Conversely, the bank submitting the highest Libor estimate would be required to borrow the same amount from the Libor Trust, in the relevant currency for the specified period of time, at its submitted high rate.
But as Reviews tend to be less “inventive” and more “gut wrenchingly predictable”, it seems more likely he will hew closer to Nils Pratley’s suggestion in the Guardian:
A mass of technical issues remain for Martin Wheatley, the Financial Services Authority official leading the inquiry, to address in his report on Friday. For example: how do you switch to surer benchmarks based on actual lending if there are no transactions on a given day in some of the markets? Remember, there is no single Libor rate; instead there are benchmarks covering 15 borrowing periods in 10 different currencies.
That’s one detailed puzzle for Wheatley to solve. But his main proposal should be easy: make it a criminal act to try to manipulate Libor.
Expect more legislation, more intervention, and a lot of locking of stable doors when the horse is nowhere to be found.
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