The banking industry can no longer be trusted to set a benchmark interest rate – that lies behind trillions of pounds of mortgages, credit cards, small business loans and financial derivatives – without the supervision of government regulators, the industry's lobby group conceded yesterday.
The scale of the manipulation of the London Interbank Offered Rate, or Libor, which was revealed by the twin investigations into Barclays, threatens to wreck the integrity of the measure and cause serious ripples across financial markets. The interest rate on home loans and credit cards is tied to Libor, as are the valuations of complex financial instruments traded across the world.
The British Bankers' Association (BBA), which is in charge of Libor, faces serious questions over its processes after regulators in the US discovered that it knew as long ago as 2008 that the rate was being manipulated. It only launched a review earlier this year.
According to the US Commodities Futures Trading Commission, in April 2008 a senior Barclays manager informed BBA in a telephone call that it had not been reporting accurately and that other banks were probably also cheating. "We're clean, but we're dirty-clean, rather than clean-clean," the Barclays executive said. The BBA representative replied: "No one's clean-clean."
The BBA said the disclosures were "shocking" but it did not know about the 2008 conversation until this week and would investigate fully.
The Financial Services Authority, the City of London regulator, is overseeing the BBA's review of how Libor is set. Currently, a panel of elite banks voluntarily submit a rate that they say reflects their very short-term borrowing costs. "The banks which contribute to the Libor rate must meet the necessary obligations to their regulators," the BBA said yesterday.