King Says Libor Deceit Shows How Wrong U.K. Banking Became

Bank of England Governor Mervyn King said the “deceitful manipulation” of Libor reveals wider cultural flaws in Britain’s banking system, as officials warned bank chiefs need to rebuild trust.

“Everyone now understands that something went very wrong with the U.K. banking industry,” King said at a press conference to present the central bank’s Financial Stability Report in London today. “From excessive levels of compensation, to shoddy treatment of customers, to a deceitful manipulation of one of the most important interest rates, we can see that we need a real change in the culture of the industry.”

King spoke at the end of week in which Britain’s four biggest lenders admitted to mis-selling derivatives to clients and Barclays Plc was fined $451 million for manipulating the London interbank offered rate. Barclays Chief Executive Officer Robert Diamond is under pressure from lawmakers to quit. King and his officials were questioned by reporters today on whether bank chiefs are “fit and proper” to run their institutions.

“We’re not going to comment on fitness and properness of anybody in this context,” said Andrew Bailey, who will become head of U.K. banking supervision at the Financial Services Authority next month. “If we now see there is a fundamental breakdown of trust, then the boards of these institutions have to recognize that that trust has to be got back, and they have to think very hard about how that is done.”

Vickers Report

King said the Libor revelations helped reinforce the argument of why the U.K. government must implement as soon as possible the proposals from John Vickers’s Independent Commission on Banking, which recommended banks separate their consumer and investment units.

“What is most important in my view is to think through and implement the recommendations of the Vickers Commission so we can go as far as to possible to separate basic banking on one hand and investment banking on the other,” King said. “The cultures of the two are very different and we’ve seen how damaging it has been the consequences of the culture of one infecting the other.”

Libor is determined by banks’ daily estimates of how much it would cost them to borrow from one another for different time frames and in different currencies. Because banks’ submissions aren’t based on real trades, the potential exists for manipulation by traders. At least a dozen firms are being probed by regulators worldwide for colluding to rig the rate, the benchmark for more than $360 trillion of securities, including mortgages, student loans and swaps.

Cameron’s View

Prime Minister David Cameron said today that Barclays has “serious questions to answer” after its fine. Chancellor of the Exchequer George Osborne signalled yesterday there could be a criminal investigation.

“People are rightly angry about the behavior of the banks, and so am I,” Cameron said at a press conference in Brussels. “People want to see real accountability for what has happened. When people have broken the rules, they should face the consequences and this needs a change of the culture.”

Diamond “and the whole management team have got some very serious questions to answer,” Cameron said. “We need to see trust restored.”

With other lenders facing sanctions in the libor probe, the British Bankers’ Association is under pressure to prove the rate is fit for purpose. The BBA, which has overseen Libor for 26 years, created a steering group of bankers and regulators in March to consider reforms in light of the investigation.

Libor Calculation

“The idea that one can base the future calculation of Libor on the idea that ‘my word is my Libor’ is now dead and it will have to be based in the future, in my judgment, on actual transactions in order to bring back credibility to the system itself,” King said. “I very much hope that in the discussions that are already taking place in the working group that the BBA have convened to discuss this, we will end up with a new regime based on actual transactions.”

Royal Bank of Scotland Group Plc, Lloyds Banking Group Plc, HSBC Holdings Plc and Barclays will compensate small and medium-sized businesses improperly sold interest-rate derivatives following a probe by the Financial Services Authority, the regulator said separately today.

“There is a degree of cynicism and greed that is quite shocking,” FSA Chairman Adair Turner said alongside King today. “We would be fooling ourselves if we thought that some of the behavior which were evident in the particular areas of Libor fixing are not found in some other areas of trading activity as well.”

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