King Says Central Banks May Need Bigger Rate Role After Libor

Bank of England Governor Mervyn King said central banks may need to play a bigger role in the setting of benchmark interest rates after lenders including Barclays Plc (BARC) and UBS AG were fined for rate-rigging.

King made the comment in a statement accompanying a Bank for International Settlements report published today. A working group at the Basel-based institution said there is an “urgent” need to strengthen the reliability of benchmarks such as Libor and Euribor and improve the choice of rates.

“Central banks must play an important role in supporting the development of alternative reference rates,” said King, who is also the chairman of the BIS. The report “makes a significant contribution to the ongoing examination of reference rates used in financial markets.”

The report said central banks can help by promoting “better governance and oversight.” The rate-rigging scandal has seen Barclays, UBS and Royal Bank of Scotland Group Plc fined more than $2.5 billion by U.S. and U.K. regulators, while other firms are still being probed.

The BIS report said financial resilience could be improved by having a choice among a number of “reliable” rates and that central banks could help market partipants with any transition to a new rate. It also said that in some cases, central banks or supervisory authorities “could become more actively involved in producing reference rates.”

“The decisions to do so would depend on the mandate of the individual central bank and the evolution of money markets in each jurisdiction,” the group said.

The group, led by Bank of Japan (8301) Assistant Governor Hiroshi Nakaso and made up of officials from 13 central banks and monetary authorities, examines the possible risks to monetary- policy transmission and financial stability from deficiencies in the design of reference rates or market abuse.

“The group identifies an urgent need to strengthen the reliability and robustness of existing reference rates and a strong case for enhancing reference rate choice,” the BIS said. “Both call for prompt action by the private and the public sector.”

-- Editors: Fergal O’Brien, Jennifer M. Freedman

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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