Chairman of the Federal Reserve Ben Bernanke and Chairman of the Commodity Futures Trading Commission Gary Gensler expressed concern on Tuesday that there are still issues with a key interest rate known as Libor.
Libor is a benchmark interest rate used in derivatives contracts and other financial products and services, including mortgages and student loans. The world’s largest banks submit estimates of the interest rate at which the institutions could borrow short-term financials from other banks. The recent Libor scandal, in which authorities allege that Barclays manipulated interest rates to improve profits and deflect concerns regarding the bank’s health, has shed light on systemic flaws in the calculation of Libor.
“If these key benchmarks are not based on honest submissions, we all lose,” Gensler said during a hearing in front of the Senate Agriculture Committee, according to DealBook.
Bernanke echoed those concerns, saying that he lacked “full confidence” in the process used to calculate Libor.
The Federal Reserve has come under fire recently over its knowledge of potential Libor manipulation. Documents released last week reveal that the New York Federal Reserve was aware of Barclays’s artificial rate submissions in 2008. British authorities in London said on Tuesday that they were not made aware of Barclays’s illegal conduct by the New York Fed, DealBook reports.
Rep. Randy Neugebauer (R-Texas), the chairman of the House subcommittee investigating the scandal, announced plans on Tuesday to request documents from the New York Fed regarding Citigroup, Bank of America and JPMorgan, all three of which are involved in establishing interest rates.
“At no stage did [Geithner] or anyone else at the New York Fed raise any concerns with the bank that they had seen any wrongdoing,” Governor Mervyn A. King of the Bank of England said, DealBook reports. “There was no suggestion of fraudulent behavior.”
Geithner did, however, suggest reforms to the rate-setting process. The Bank of England passed the suggestions to the British Bankers’ Association, which subsequently adopted changes to the process in late 2008, though the illicit activity continued through 2009.
Bernanke defended the Fed’s actions in 2008, saying that the responsibility of the central bank “was to make sure that the appropriate authorities had the information, which they did,” according to DealBook.
The Libor scandal may involve more than 10 other major banks, including the Royal Bank of Scotland, UBS, Citigroup and JPMorgan.
Gensler said that the CFTC “has and will continue vigorously to use our enforcement and regulatory authorities to protect the public, promote market integrity and ensure that these benchmarks and other indices are free of manipulative conduct and false information,” DealBook reports.