The London Interbank Offered Rate (Libor) is flawed and should no longer be calculated by the British Bankers’ Association (BBA), Howard Davies, Professor at Sciences Po and former chairman of the Financial Services Authority told CNBC.
Speaking on ”Worldwide Exchange”,Davies said that the most important issue at the moment was to re-establish market confidence in rates and let the enforcement procedures deal with the matter accordingly.
"What we need is something that triangulates self-submission,” he said. “There ought to be a mechanism of checking around the market that any self-submitted rate does reasonably reflect what someone would have lent to that bank.”
“The most important thing is to in the benchmark rates. I think that will probably mean the BBA should give up doing Libor , it should be handled in some other way with some quasi-official body.”
This comes at the same time as Barclays have announced that Anthony Salzwill lead an independent business practices review into the bank, which will assess the “current values, principles and standards of operation”.
The Wall Street Journal has also reported that individual traders around the world are now being investigated for the alleged manipulation of interest rates. It’s thought that these traders are from at least nine different banks.
“There have been a number of interesting pieces of academic work using auction theory about how you might re-establish confidence,” Davies explained.
“I think that needs to be explored as a matter of urgency, indeed, I’m pretty clear the [Bank of England] is going to do that, Mervyn King has summoned a meeting in Basel in September to try to work up a better way of doing this.”
Davies thought it was probable that any change in the way that interest rates are calculated would disturb markets.
“I guess in the short run there is a risk of more volatility but I don’t think you can avoid that, the markets are volatile at present.”