Central bankers agree to initiate Libor inquiry

Mervyn King

Following a meeting of central bankers at the Bank of International Settlements in Switzerland, Mervyn King, the governor of the Bank of England, said that a Libor inquiry would be launched.

The inquiry, which will be led by top officials, will coincide with an ongoing investigation by the Financial Services Authority, Businessweek reports.

“[The probe will] consult with the market in order to provide input into the wider official debate coordinated by the Financial Stability Board,” King said, according to Businessweek. “The BIS governors will look forward with great interest to the recommendations of the Wheatley Libor review and to the reports of other official groups examining reference rates used in financial markets.”

Libor rose to the top of the agenda after Barclays agreed to pay $464 million for its participation in Libor rate-rigging, leading to the resignations of several chief executives at the bank. Public confidence in the banking industry has dwindled in the wake of the scandal.

“The central banks have somehow got to get moral integrity back in the financial system, and King will fee this himself,” Marcus Miller, professor of economics at the University of Warwick, England, said, Businessweek reports. “If you can’t trust London to fix the rate, what’s the banking system all about?”

The Global Financial Markets Association, representing the banking industry in Hong Kong, Brussels and Washington, said on Monday that all key financial benchmarks should be subject to oversight.

“The key benchmark indexes around the world need to be subject to consistent, transparent and sound practices to ensure the smooth functioning and efficiency of global financial markets,” the GFMA said, according to Businessweek.

A recent poll revealed that 44 percent of global investors expect Libor to be replaced by a more regulated figure within the next five years, 32 percent predicted the rate will continue to be set using the current process and 22 percent indicated uncertainty.

Mark Carney, the governor of the Bank of Canada and the chairmain of the FSB, said that the board will also consider Libor alternatives. The European Union has also announced its dedication to tougher supervision of market indices.

“We’re very pleased that there is awareness globally on the need to tackle how interbank lending rates are set,” Stefaan De Rynck, a spokesman for Michael Barnier, the EU’s financial services chief, said, Businessweek reports. “For action to restore trust in interbank lending rates, including Libor, coordination is needed at a global level.”

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