Mark Carney, the next Bank of England governor, said global regulators will set up a task force with banks in a bid to repair or replace tarnished benchmarks in the wake of Libor and other rate-rigging scandals.
The Financial Stability Board, chaired by the Canadian, has recruited Martin Wheatley, chief executive officer of the U.K.’s Financial Conduct Authority, and Federal Reserve Governor Jeremy Stein to lead a probe into “options for robust reference rates,” with an initial focus on interest-rate benchmarks.
They will review options for reliable rates “that meet the private sector’s needs,” said Carney, who takes the helm at the Bank of England next month. “We have to recognize that even some transaction-based benchmarks could be manipulated; it depends on the depth of the market.”
Global regulators have fined UBS AG, Barclays Plc and Royal Bank of Scotland Group Plc about $2.5 billion for distorting Libor and similar benchmarks. At least a dozen firms remain under investigation around the world. Probes into potential rigging have extended beyond interbank lending rates to include markets ranging from oil prices to foreign exchange.
Carney said the task force would include a “market participants group” drawn from the industry and would report back with its findings by “summer of next year.”
Under the FSB plan, banks and other market players “will lead analysis and potentially make suggestions for alternatives,” including improvements of existing benchmarks, Carney said.
The FSB probe will examine whether existing benchmarks -- and possible alternatives -- meet international standards and would also study “any transition issues between rates,” he said.
The FSB’s work “needs to result in tougher regulation based as far as possible on real transactions,” Arlene McCarthy, a U.K. lawmaker at the European Parliament, leading its work on rules to combat market abuse, said today. “We do not need a non-binding principles-based approach or optional options because this will not install confidence.”
Research on benchmarks, particularly on Libor, “shows there are no single, perfect substitutes,” said Richard Reid, a research fellow for finance and regulation at the University of Dundee in Scotland.
“The peculiarities of possible alternatives to Libor for example, suggest that it would be difficult for any of them to fully substitute” for the rate “in all cases,” he said by e-mail.
Instead of designing replacements, the final outcome of regulators’ work may be a “much more robust, transparent and accountable process for the setting of key, current benchmarks,” Reid said.
The FSB’s move adds to a wave of interlocking international initiatives to toughen regulation of benchmark-setting in the wake of the rate-rigging scandals.
The International Organization of Securities Commissions, which brings together financial market regulators from over 100 nations, is also working on global principles for benchmark setting.
Iosco’s work has been led jointly by Wheatley and Gary Gensler, the chairman of the U.S. Commodity Futures Trading Commission.
Gensler has urged that that benchmarks such as Libor and Euribor that are based on banks’ estimates are “unsustainable” and need to be rapidly replaced with alternatives based on real data.
Wheatley has suggested a dual-track system, in which Libor would run in parallel to an alternative, transactions-based benchmark and be phased out over time.
Michel Barnier, the EU’s financial services chief, is seeking legislation to enforce public oversight of rate setting.
“The EU is due to come forward with a legislative proposal” and “it would be prudent if we had a coordinated and coherent effort and result on benchmarks,” said McCarthy, a Labour member of the EU parliament.
While authorities from the U.S. to Singapore grapple with the aftermath of the rate-rigging crisis, regulators are also continuing their efforts to curtail bankers’ excessive risk taking.
Carney said further work is needed at the FSB to ensure that international standards designed by the FSB on pay are effective.
Carney said it was a mistake “to have the view that somehow you can design a perfect compensation scheme.”
“And that’s why you need the right culture within institutions,” he said. “It’s also why you need a host of other measures that we put into place at the FSB.”
The board said it will publish a “progress report” on banker pay when the leaders of the Group of 20 meet in September.
The FSB also agreed to publish plans next month for bolstering the solvency of globally systemically important insurance companies. This would include a list of the insurers in that category, Carney said.
Carney also said that plans by the European Central Bank to conduct an analysis of banks’ balance sheets would be important for strengthening the euro-area banking system.
The ECB exams should be accompanied by “clarity on the availability of adequate capital backstops” for lenders revealed as having weaknesses, the FSB said in its post-meeting statement.
The FSB also called on supervisors to ensure that scenarios applied in bank stress tests are tough enough, especially to reflect market volatility witnessed over the “last several weeks.”
Stress tests should “involve considerably elevated interest rate risk, widening credit spreads, falls in asset prices, and material volatility in foreign exchange markets and capital flows,” the FSB said.
The FSB comprises regulators, central bankers and finance ministry officials from the Group of 20 nations.