Libor is “structurally flawed” and an international effort would be needed to restore the rate’s credibility as the leading benchmark for mortgages, derivatives and corporate lending around the world, Ben Bernanke, US Federal Reserve chairman, told Congress on Tuesday.
In his first public testimony since Barclays paid $460 million in penalties for attempting to rig the London interbank offered rate , Mr. Bernanke said US central bankers became concerned about “problems” with Libor toward the end of 2007, when market rumors began to circulate that banks were understating the rates at which they could borrow.
“The Libor system is structurally flawed,” Mr. Bernanke said. “It is a major problem for our financial system and for the confidence in the financial system ... we need to address it.”
The Fedchairman also suggested that Libor’s future might be in doubt, telling the Senate banking committee: “I would like to see additional reforms to the Libor process, assuming that Libor will continue to be a benchmark for financial contracts.”
In April 2008, a Barclays employee told an analyst at the Federal Reserve Bank of New York that the UK bank was lowballing its Libor submissions in order not to appear weaker than its peers.
Mr. Bernanke said the New York Fed “responded very quickly” by briefing a host of US regulators on May 1 2008 and urging the Bank of Englandand the British Bankers Association, which sponsors the rate, to reform it. The BBA ultimately adopted only two of the Fed’s six suggestions.
“There was active effort to report to all the relevant policy makers and enforcement agencies the information that had been received,” Mr. Bernanke told Congress. He added that the Fed did not suspect at the time that bank traders were trying to manipulate Libor rates “for profit”, but did have evidence that some were “possibly submitting low rates to avoid appearing weak”.
The US Commodity Futures Trading Commissionhad launched an investigation in April 2008 and Barclays eventually admitted manipulating rates for profit and to appear stronger in the market.
Mr. Bernanke’s description of the US response contrasted sharply with testimony earlier on Tuesday from Sir Mervyn King, governor of the Bank of England, who told a committee of the UK Parliament that he had only learned about “deliberate misrepresentation” of Libor rates earlier this month. “The first I knew of any alleged wrongdoing was when the reports came out two weeks ago,” he said.
Asked by MPs why the UK had “failed to spot” problems with a benchmark rate set in London, Sir Mervyn insisted that the BoE had done its job: “There’s a world of difference between people saying they don’t know how to submit Libor because the market is dysfunctional and deliberate misrepresentation.”
At the same hearing Paul Tucker, Sir Mervyn’s deputy, said US Treasury secretary Tim Geithner’s 2008 reform proposals did not “set alarm bells ringing”, despite the US call for “procedures designed to prevent accidental or deliberate misreporting”. The Fed memo did not explicitly cite evidence of misbehavior.
However, the minutes of a Bank of England committee meeting in the autumn of 2007 note that “several group members thought that Libor fixings had been lower than actual traded interbank rates through the period of stress”.
Andrew Tyrie, who chairs the UK Parliamentary committee that questioned Sir Mervyn, said the Treasury select committee “will want to consider whether the Bank of England acted sensibly and quickly or whether officials ended up dependent on the Americans and were slow out of the traps”.