The claim

“The authorities, the regulators – they are there in order to regulate these issues…they are the ones who supervise what is actually undertaken. That is where the responsibility lies.”
Angela Knight, Chief Executive, British Bankers’ Association

The background

Much of the discussion surrounding today’s revelations about Barclays’ involvement in a rate-fixing scandal has focussed on the weakness of banking regulation.

Barclays has been fined a total of £290m for letting its traders manipulate the Libor and Euribor interbank lending rates to suit the bank’s trading positions.

The high street giant is one of 16 banks who tell the compilers of Libor the rate at which they are prepared to lend to other banks every morning. An average is taken and the overall rate is seen as a key indicator of health in the global markets.

Between 2005 and 2009 Barclays gave false information about their real borrowing rates in a bid to mask their financial problems.

Now George Osborne has wholesale reform of the banking regulation system is needed, and criminal investigations could follow.

The Chancellor also blamed the “light-touch” style of regulation favoured by former Prime Minister Gordon Brown and then City Minister Ed Balls for the failure to crack down on the abuse.

The British Bankers Association (BBA) – the trade association which publishes Libor - said it had launched a review into how Libor is set, adding: “As part of this review we will now be asking the authorities to consider in what manner the Libor-setting mechanism should be regulated in the future.”

Despite the BBA’s apparent ownership of the Libor brand, outgoing chief executive Angela Knight appeared to shift the blame to other “authorities” and “regulators” when interviewed by Channel 4 News today.

But all this talk of inadequate regulation ignores the fact that the BBA was actively monitoring Libor throughout the period when the wrongdoing took place.

The analysis

The Wall Street Journal first broke this story in April 2008. The newspaper reported: “In a development that has implications for borrowers everywhere…bankers and traders are expressing concerns that the London inter-bank offered rate, known as Libor, is becoming unreliable.”

The implications of the world’s most trusted interest rate losing its credibility were “actually kind of frightening if you really sit and think about it”, one mortage banker told the paper. Indeed.

Questions about Libor had actually been raised as far back as November 2007 at a Bank of England meeting with bank chiefs, and it seemed clear to everyone at the time that it was the BBA that was responsible for putting its house in order.

BBA spokesman John Ewan said the trade group was already monitoring the situation in early 2008 and would bring forward an internal review, saying: “We want to ensure that our rates are as accurate as possible, so we are closely watching the rates banks contribute.”

And no wonder. By now independent economists had begun to come up with analysis that showed there was evidence of jiggery-pokery.

A 2008 study by the Bank for International Settlements concluded that Libor rates could “be manipulated if contributor banks collude or if a sufficient number change their behaviour”.

At around the same time, a study commissioned by the government found “little evidence of manipulation” by banks.

But by August of that year three US economists published this paper, using sophisticated analysis to find evidence of “questionable patterns” where the Libor rate, again, had not behaved as you would expect it to under normal market conditions.

What was the BBA doing during this period?

On 17 April 2008 a spokesman said the association was conducting a review of Libor and working closely with the Bank of England on the matter.

He added that the BBA would strictly enforce the rules and remove banks who had submitted inaccurate figures from the panel of 16. But there was no independent oversight: the review would be carried internally by BBA investigators who would remain anonymous.

In May of that year Mr Ewan said he had interviewed banks, hedge funds and academics as part of the review.

The BBA initially said it would not be making any major changes to the Libor system, then suddenly hinted that it would increase the panel of banks reporting their borrowing costs in the biggest shake-up for a decade, saying: “The changes will boost the confidence of its many users.”

But two months later there was another change of heart, with the BBA rejecting several radical proposals designed to ensure accuracy. The panel of 16 would remain unchanged.

But the association did promise to improve its scrutiny of the rates submitted by banks. Banks’ input would be “actively monitored every day” and a BBA committee would meet every month to review questionable quotes.

Despite these assurances, in September 2008 accusations of inaccuracy flared up again after analysts noticed that borrowing rates for a US Federal Reserve auction were much higher than Libor, in defiance of all market logic.

BBA spokeswoman Lesley McLeod insisted: “Libor is accurate. It is constantly monitored and currently reflects the extreme market volatility present in these unprecedented circumstances.”

The verdict

We’ve got to take issue with Angela Knight’s suggestion that the responsibility for this scandal lies elsewhere.

When suggestions of rate-rigging first surfaced years ago, along with widespread suspicion among bankers and academics, the BBA made no attempt to shift the blame to others.

The association clearly knew about market misgivings about the veracity of the Libor rates as early as November 2007.

Throughout 2008 the BBA promised investors it was monitoring the information supplied by banks closely. There were no revelations of wrongdoing – and no suggestion that it was anyone else’s responsibility to supervise Libor.

The trade body promised to monitor the situation on a daily basis, but failed to undercover wrongdoing that we now know was rife at Barclays.

The BBA professed to be “shocked” at the report into wrongdoing at Barclays today, but the long history of its involvement in this scandal makes that difficult to believe.

By Patrick Worrall

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