Central Bankers Meet in Basel as King Leads Libor Talks

King to Lead Central Bankers Seeking Solution to Libor Damage
Bank of England Governor Mervyn King called the gathering in July after Barclays Plc was fined 290 million pounds ($462 million) for its role in manipulating Libor, which triggered the resignations of its chairman, chief executive officer and chief operating officer. Photographer: Chris Ratcliffe/Bloomberg

Bank of England Governor Mervyn King said global central bankers agreed to set up an inquiry into Libor after confidence collapsed in the benchmark rate for more than $500 trillion of securities.

The announcement follows a meeting yesterday of central bank governors led by King in his role as chairman of the Economic Consultative Committee at the BIS in Basel, Switzerland. The inquiry will be led by “senior officials,” and comes as Financial Services Authority Managing Director Martin Wheatley conducts a separate investigation into how the London interbank offered rate is set.

The probe will “consult with the market in order to provide input into the wider official debate coordinated by the Financial Stability Board,” King said in an e-mailed statement today. “The BIS governors look forward with great interest to the recommendations of the Wheatley Libor review, and to the reports of other official groups examining reference rates used in financial markets.”

King put Libor on the agenda after Barclays Plc was fined 290 million pounds ($464 million) for its role in manipulating the rate, which triggered the resignations of its chairman, chief executive officer and chief operating officer. The Bank of England became embroiled in the scandal, and lawmakers criticized it last month for “naivety” in its handling of questions about the rate as far back as 2007.

“The central banks have somehow got to get moral integrity back in the financial system, and King will feel this himself,” said Marcus Miller, a professor of economics at the University of Warwick, England. “If you can’t trust London to fix the rate, what’s the banking system all about?”

Draghi, Shirakawa

The BIS was founded in 1930 and acts as a central bank for the world’s monetary authorities. King took over in November as chairman of its Global Economy Meeting and the ECC, which meets every two months. Participants this month include European Central Bank President Mario Draghi, Bundesbank President Jens Weidmann, Bank of Canada Governor Mark Carney and Bank of Japan Governor Masaaki Shirakawa.

Libor is derived from a survey of banks conducted each day on behalf of the British Bankers’ Association in London. A lobby group representing the banking industry in Brussels, Washington and Hong Kong said today that all systemically significant financial benchmarks should be subject to regulatory oversight following the Libor scandal.

“The key benchmark indexes around the world need to be subject to consistent, transparent and sound practices to ensure the smooth functioning and efficiency of global financial markets,” the Global Financial Markets Association said in a statement on its website

Global Poll

Forty-four percent of investors in a Bloomberg Global Poll published on Sept. 7 said Libor will be supplanted by a more regulated model within five years. Thirty-four percent predicted the rate will continue to be set by banks in the current fashion, while 22 percent said they didn’t know.

The quarterly poll of 847 investors, analysts and traders who are Bloomberg subscribers was conducted Sept. 4.

In the U.S., the House Financial Services Committee is scrutinizing the Federal Reserve Bank of New York about its knowledge of the underreporting of Libor.

Carney, who is chairman of the FSB, has said the board will consider alternatives to the rate, while the European Union has also pledged tougher supervision of Libor, Euribor and other market indices. It’s weighing options such as forcing banks to provide real transaction data rather than estimates and increasing the number of lenders involved in the rate setting.

“We’re very pleased that there is awareness globally on the need to tackle how interbank lending rates are set,” said Stefaan De Rynck, a spokesman for the EU’s financial services chief, Michel Barnier. “For action to restore trust in interbank lending rates, including Libor, co-ordination is needed at global level.”

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