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Libor review calls for urgent reform of 'broken' system Libor review proposes overhaul of 'broken' system
(about 2 hours later)
A review of the Libor rate-fixing scandal will recommend a complete overhaul of a system that is "broken" and led to "shocking behaviour".A review of the Libor rate-fixing scandal will recommend a complete overhaul of a system that is "broken" and led to "shocking behaviour".
Financial regulator Martin Wheatley will say later on Friday that bankers who try to manipulate the inter-bank interest rate should face prosecution.Financial regulator Martin Wheatley will say later on Friday that bankers who try to manipulate the inter-bank interest rate should face prosecution.
He also wants the banking association that supervises Libor to be stripped of the role, saying it "clearly failed".He also wants the banking association that supervises Libor to be stripped of the role, saying it "clearly failed".
In July, Barclays' was fined £290m because its traders tried to rig Libor. In July, Barclays was fined £290m because its traders tried to rig Libor.
Following the scandal, and revelations that other banks were implicated, Chancellor George Osborne asked Mr Wheatley, managing director of the Financial Services Authority, to review Libor.Following the scandal, and revelations that other banks were implicated, Chancellor George Osborne asked Mr Wheatley, managing director of the Financial Services Authority, to review Libor.
In a speech in the City of London, Mr Wheatley will say that although the interest rate does not need replacing, urgent reforms were vital. In a speech in the City of London, Mr Wheatley will say that although the interest rate does not need replacing, urgent reforms are vital.
Libor - the London Interbank Offered Rate - represents the cost of borrowing between banks, and is then used as a reference rate to determine the interest charged on loans to companies and individuals.Libor - the London Interbank Offered Rate - represents the cost of borrowing between banks, and is then used as a reference rate to determine the interest charged on loans to companies and individuals.
Mr Wheatley will say in his speech that Libor sets a benchmark for more than $300 trillion worth of loans and transactions, adding that he agrees with those who call it "the most important figure in finance".Mr Wheatley will say in his speech that Libor sets a benchmark for more than $300 trillion worth of loans and transactions, adding that he agrees with those who call it "the most important figure in finance".
But he says: "The reason we are here, however, is that we have been misled. The system is broken and needs a complete overhaul. "The reason we are here, however, is that we have been misled," he will say. "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.""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."
'Careless''Careless'
People, he says, "were rightly upset that something so important was so badly run, had such poor governance, and was manipulated without regard to the consequences." People, he says, "were rightly upset that something so important was so badly run, had such poor governance, and was manipulated without regard to the consequences".
In a stinging criticism of the British Bankers' Association, which currently oversees Libor, Mr Wheatley says it was "careless" in its approach to policing Libor and put too much trust in a system that "did not have the right level of checks and balances in place".In a stinging criticism of the British Bankers' Association, which currently oversees Libor, Mr Wheatley says it was "careless" in its approach to policing Libor and put too much trust in a system that "did not have the right level of checks and balances in place".
His recommendations will include:His recommendations will include:
  • Introducing a new regulatory structure for Libor, including criminal sanctions for those who attempt to manipulate it
  • Transferring the governance role from the British Bankers' Association (BBA)
  • Inviting other groups to apply to take over the role, and draw up a code of conduct and carry out regular audits
  • Encourage more banks to submit Libor rates to make it more representative
  • Changing some of the technical data on which the inter-bank rate is based
  • Holding back the public disclosure of some data for three months to prevent manipulation
  • Introducing a new regulatory structure for Libor, including criminal sanctions for those who attempt to manipulate it
  • Transferring the governance role from the British Bankers' Association (BBA)
  • Inviting other groups to apply to take over the role, and draw up a code of conduct and carry out regular audits
  • Encourage more banks to submit Libor rates to make it more representative
  • Changing some of the technical data on which the inter-bank rate is based
  • Holding back the public disclosure of some data for three months to prevent manipulation
Libor is calculated each day by asking a group of large banks to disclose the interest rate at which they can borrow money. On the basis of the submissions, the BBA releases the average data to the financial markets.Libor is calculated each day by asking a group of large banks to disclose the interest rate at which they can borrow money. On the basis of the submissions, the BBA releases the average data to the financial markets.
But Mr Wheatley says the system was riddled with flaws. Libor could impact traders' bonuses, so they had an interest in pushing the rate up or down. "They were allowed to do this freely with no oversight," Mr Wheatley says.But Mr Wheatley says the system was riddled with flaws. Libor could impact traders' bonuses, so they had an interest in pushing the rate up or down. "They were allowed to do this freely with no oversight," Mr Wheatley says.
At the height of the financial crisis when bank finances were weak, there was an incentive to submit a low Libor figure. A high figure might call into question a bank's creditworthiness.At the height of the financial crisis when bank finances were weak, there was an incentive to submit a low Libor figure. A high figure might call into question a bank's creditworthiness.
Conflicts of interestConflicts of interest
Mr Wheatley says: "What's more and worse, is that we are not talking about a few rogue individuals here, but a systemic problem. In the case of Barclays, for example, there was a web of traders that worked together to try and manipulate Libor to benefit one another.Mr Wheatley says: "What's more and worse, is that we are not talking about a few rogue individuals here, but a systemic problem. In the case of Barclays, for example, there was a web of traders that worked together to try and manipulate Libor to benefit one another.
"To sum up, the system had in-built conflicts of interest from the start - banks could submit what they wanted - and with traders' bonuses dependent on the Libor rate, and no bank wanting to be seen as vulnerable in such a transparent system, too many people had a vested interest in gaming the system.""To sum up, the system had in-built conflicts of interest from the start - banks could submit what they wanted - and with traders' bonuses dependent on the Libor rate, and no bank wanting to be seen as vulnerable in such a transparent system, too many people had a vested interest in gaming the system."
Barclays is the only bank to have been fined so far, but it is understood at least 15 banks globally are being investigated for possible Libor manipulation.Barclays is the only bank to have been fined so far, but it is understood at least 15 banks globally are being investigated for possible Libor manipulation.
The Treasury has given its initial backing to the review's recommendations and said it was clear that self-regulation of the system had failed.The Treasury has given its initial backing to the review's recommendations and said it was clear that self-regulation of the system had failed.
Ahead of Mr Wheatley's speech, Greg Clark, financial secretary to the Treasury, said: "Libor is a hugely important international benchmark and this report makes a series of comprehensive and practical recommendations designed to restore its credibility".Ahead of Mr Wheatley's speech, Greg Clark, financial secretary to the Treasury, said: "Libor is a hugely important international benchmark and this report makes a series of comprehensive and practical recommendations designed to restore its credibility".
The much-criticised BBA said the review was an "essential step" towards reforming Libor and signalled it would accept Mr Wheatley's recommendation that oversight be handed to another body.The much-criticised BBA said the review was an "essential step" towards reforming Libor and signalled it would accept Mr Wheatley's recommendation that oversight be handed to another body.
"The absolute priority now for everyone is to ensure the provision of a reliable benchmark which has the confidence and support of all users, contributors and global regulators, and we will work closely with the government and regulatory bodies to ensure this," the BBA said in a statement."The absolute priority now for everyone is to ensure the provision of a reliable benchmark which has the confidence and support of all users, contributors and global regulators, and we will work closely with the government and regulatory bodies to ensure this," the BBA said in a statement.
Consumer group Which? called on the government to take forward the recommendations as soon as possible.Consumer group Which? called on the government to take forward the recommendations as soon as possible.
Richard Lloyd, executive director of Which?, said: "There must be no delay. Action must be taken to fix our broken banking system and bring a return to banks for customers, not bankers."Richard Lloyd, executive director of Which?, said: "There must be no delay. Action must be taken to fix our broken banking system and bring a return to banks for customers, not bankers."