Libor review calls for ‘complete overhaul’

Libor hit the headlines over the summer after it was found that staff at Barclays Bank had tried to manipulate the figure, which is linked to around $300 trillion of contracts and financial instruments worldwide. The scandal led to the departure of chief executive Bob Diamond.

Following the scandal, George Osborne commissioned Martin Wheatley (pictured, left), managing director of the consumer and markets business unit of the Financial Services Authority, to review Libor.

Publishing his report today, Mr Wheatley said the “system is broken and needs a complete overhaul”, but added that the Libor system was not so broken that it should be replaced.

The British Bankers’ Association clearly failed to properly oversee the Libor setting process and should take no further role in the administration and governance of Libor. – Martin Wheatley

The review said: “The Wheatley Review has concluded that the issues identified with Libor, while serious, can be rectified through a comprehensive and far-reaching programme of reform; and that a transition to a new benchmark or benchmarks would pose an unacceptably high risk of significant financial instability, and risk large-scale litigation between parties holding contracts that reference Libor.”

The Wheatley Review outlined a ten-point plan to overhaul Libor, the main point of which was the establishment of a new administrator to oversee how it is set (see box).

Under the current system, banks submit daily information on the level at
which it would cost them to borrow from other banks. They provide
information on lending rates for 15 different currencies and ranging
from an over night loan to a 12-month loan. 

The top and bottom two rates
are removed from each different lending category to provide an average
lending rate - Libor - which it was hoped would nullify any attempts to
manipulate the lending rate.

The British Bankers’ Association (BBA) will transfer responsibility for Libor to the new administrator, which will take control of compiling and distributing the data.

The body fell under criticism from Mr Wheatley over its role regulating Libor submissions. “The British Bankers’ Association clearly failed to properly oversee the Libor setting process and should take no further role in the administration and governance of Libor,” he said.

Other suggested points are that banks’ transactions data should be used to verify their Libor submissions, that Libor should not be used for currencies where there is not enough data to verify the submitted rates, and that a new code of conduct should be drawn up.

The BBA should also publish the Libor submissions of individual banks every three months, in a hope that greater transparency will deter attempted manipulation.

Sir Mervyn King, the governor of the Bank of England who was this month interviewed live for the first time on Channel 4 News, welcomed the review. He said the bank would want the proposals “implemented as soon as possible”.

“Over the medium to long term, further thinking will be needed to meet the challenge of benchmarks based on thinly traded markets, especially when they are quote-based, ” he added.