BBA Poised to Give Up Libor Oversight on Rigging Scandal

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Libor Failures Neuter BBA as Lobby May Lose Oversight of Rate
The logo for the British Bankers Association (BBA), is seen outside Pinners Hall, the location of their offices in Old Broad Street, London. Photographer: Chris Ratcliffe/Bloomberg

The British Bankers’ Association signaled it will give up oversight of the London interbank offered rate following claims traders manipulated the benchmark.

Financial Services Authority Managing Director Martin Wheatley is reviewing whether to bring oversight of the benchmark under the control of regulators after Barclays Plc, Britain’s second-biggest lender, paid a record 290 million-pound ($471 million) fine in June for manipulating Libor. Regulators worldwide are probing at least a dozen banks over allegations they also tried to rig the rate.

“If Mr. Wheatley’s recommendations include a change of responsibility for Libor, the BBA will support that,” the London-based lobby group said in a statement today.

The BBA’s role as guardian of Libor, used to set rates for for at least $300 trillion of securities, has been under pressure since the Bank for International Settlements first raised concern in 2008 that the benchmark was being manipulated.

The BBA’s response was branded inadequate by the Bank of England, while U.S. Treasury Secretary Timothy Geithner has said private, unregulated bodies such as the BBA shouldn’t oversee rates such as Libor.

“They have failed to pick up and respond to the signals early enough so I’m not confident the BBA’s historic role has been good,” Wheatley said at an Aug. 10 press conference in London. “Frankly it hasn’t. It still remains an open question as to whether from an industry perspective it’s still the best body to continue with that.”

Increased Oversight

After regulators began to probe Libor again last year, the BBA started another internal review of the benchmark. As recently as June, that panel was set to resist calls to overhaul the rate by basing it on actual transactions and instead favored a beefed-up code of conduct and increased oversight, three people briefed on the talks said at the time.

The BBA’s council passed a motion on Sept. 13 to give up responsibility for overseeing the rate, two people with knowledge of the plan said today. They asked not to be identified because the meeting was private.

The BBA “didn’t live up to the responsibility that was entrusted upon them,” said Tom Kirchmaier, a fellow in the financial-markets group at the London School of Economics. “It was bad management. It’s sensible for them to say we can’t do it anymore.”

Kirchmaier said Libor oversight shouldn’t go to other regulators or the Bank of England because there may be a conflict of interest.

London Dominance

“The big question is to make sure the price-setting mechanism is robust and can’t be manipulated easily,” he said. “It shouldn’t be a regulator running the show because it’s not their job to set prices.”

The BBA represents more than 200 banks and lobbies policy makers and regulators on behalf of the industry. The century-old group helped to introduce Libor in January 1986 to cement London’s dominance in the markets for syndicated loans and interest-rate swaps. The benchmark is determined by a daily poll carried out on behalf of the BBA that asks banks to estimate how much it would cost to borrow from one another for different periods and in different currencies.

Dan Doctoroff, chief executive officer of Bloomberg LP, proposed an alternative to Libor, dubbed the Bloomberg Interbank Offered Rate, in a Wall Street Journal opinion piece last month.

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