Documents recently released by the Bank of England reveal that regulators were hesitant to announce problems with Libor in 2008, deferring instead to the British Bankers’ Association with reform suggestions.
International regulatory authorities are currently investigating the London interbank offered rate — or Libor — fixing scandal that could involve more than 10 major banks that may have reported false interest rates to increase profits and deflect concerns regarding the financial health of the institutions, CNBC reports.
In June, Barclays agreed to pay $453 million in a settlement with U.S. and British authorities over the manipulation of the key benchmark rate used in derivatives contracts and a number of financial products and services. Following the settlement agreement, legislators began investigating if and how much regulatory authorities knew of the Libor fix.
In April 2008, the New York Fed learned that Barclays had been intentionally low-balling rates. U.K. authorities testified in front of a parliamentary committee this week, saying that Fed authorities never mentioned any wrongdoing by Barclays, according to CNBC.
Treasury Secretary Timothy Geithner, who was then in charge of the New York Fed, did propose changes, which were echoed by the Bank of England, to the Libor-establishment process. The new documents suggest, however, that the Bank of England knew about potential Libor manipulation in 2007 and failed to take enforcement action against the illegal activities.
British authorities at the time were uncertain of the extent of Libor manipulation. An official from the Bank of England said in a June 2008 email that some of the issues “might go away with time.” Another official said in a May 2008 internal memo that, “Since August 2007, this problem has become more severe,” CNBC reports.
Geithner recommended that U.K. officials “strengthen governance and establish a credit reporting procedure” and “eliminate incentive to misreport,” suggestions that Governor Mervyn A. King of the Bank of England agreed to pass on to the British Bankers’ Association.
The documents show that some officials at the Bank of England sought to undermine some parts of Geithner’s reform plan. The New York Fed recommended that the BBA randomly select rates, but a Bank of England official said that “does not seem such a good idea,” according to CNBC.
Some Bank of England officials instead appeared to support a plan by a panel of senior bankers overseeing the rate-setting process to allow a number of firms to police themselves. Neither the Fed nor the Bank of England, however, was willing to help oversee Libor reforms.
One Bank of England official said in a June 2008 email that “we have a clear line” that the bank’s name “should not be used,” instead suggesting the use of the phrase “all interested parties.” The BBA responded, however, that the phrase “is just too weak” and that government should be party to maintaining the integrity of the Libor process, CNBC reports.
Regulatory authorities succeeded in the push for new wording, as the final wording of the Libor case review was published in 2008 and did not refer specifically to the central banks.