The Financial Services Authority, the top regulator of the banking industry in Britain, announced its changes to how the Libor, the benchmark interest rate which undergirds hundreds of trillions of dollars in financial products, will be derived. As expected, the British government will take responsibility for setting the Libor away from the British Bankers’ Association. They did not name a replacement for the BBA, but said they would appoint one sometime in the next year. Data providers like Bloomberg and Thomson Reuters have already shown interest in taking over.
More interesting, Martin Wheatley, the head of the FSA, said that he wants to make Libor rigging a criminal offense, to provide more of a deterrent:
The firms involved in Libor were regulated but not the market itself, so he will call for the law to be changed to make it offence to “make a false or misleading statement” to manipulate Libor.
“This would enable the FSA to use criminal powers for the worst cases of attempted manipulation” […]
“The reason we are here … is that we have been misled. The system is broken and needs a complete overhaul. The disturbing events we have uncovered in the manipulation of Libor have severely damaged our confidence and our trust – it has torn the very fabric that our financial system is built on … Governance of Libor has completely failed, resulting in the sort of shameful behaviour that we have seen. This problem has been exacerbated by a lack of regulation and a comprehensive mechanism to punish those who manipulate the system.”
Here is the entire report from the FSA. Obviously these are strong words that must be backed up with actions. It’s unclear whether the name of who issues Libor will change, or the underlying structure behind it. Wheatley did express openness to using a more market-based mechanism to derive the benchmark rates. But it does look like mostly the same system of banks distributing their estimates of the rates at which they borrow from other banks to a central processor. There would be more banks doing the submitting, and less actual rate-settings; right now, Libor handles 150 daily rates, and under the reform they would handle just 20. Market-based transactions will be incorporated “whenever possible,” according to financial regulators.
But the biggest part of this is the heavier regulation of both the banks submitting, and the central authority issuing the numbers, by the FSA. This ends the practice of self-regulation of Libor, which clearly did not work. Under the plan, banks would be subject to daily audits on their rate submissions for the first time. Furthermore, Wheatley seeks to change the culture of banking in London, which from the perspective of the Libor scandal, looks shot through with corruption and greed. “Society has lost confidence in banks, in finance, in the whole system and we need to restore that,” said Wheatley today. “Society wants the people who commit these sorts of crimes to pay the price and if that includes jail for the most extreme fraud in the system then that’s what should happen.”
The new structure for Libor doesn’t forestall the prosecution of the past actions. But it does implicitly indicate that the tools to prosecute will be inadequate, that more regulation and also stiffer penalties are needed. So don’t expect much to come from any Libor cases, at least out of Britain. Furthermore, there are compelling reasons to believe that Libor is basically a fiction that cannot be saved by more stringent regulation.