“It’s not just the structure of the index, which U.S. Federal Reserve Chairman Ben Bernanke has rightly described as flawed, but it’s the active, conscious, repeated manipulation of that index,” Carney told a press conference in Ottawa Wednesday.
Carney, who is also chair of the international Financial Stability Board, said that in his view the board can play a role in restoring confidence in the disgraced London Inter-bank Offered Rate.
That could include coming up with an alternate system to that now used to determine the rate at which banks lend to each other.
“My personal view is public authorities have to play a leading role in determining what next with Libor and if not Libor what else and how to manage that transition because there has to be absolute confidence in it,” Carney said.
Libor is set by the British Bankers’ Association based on estimates submitted to it by a group of banks as to what they believe will be the cost of borrowing from each other.
During the financial crisis of 2008, the spread between Libor and the Bank of England’s benchmark rate began to rise as investor confidence in banks fell.
Investigators believe some banks began falsely reporting lower rates.
One of Britain’s oldest and largest banks, Barclays Bank, announced last June 27 it had agreed to pay a record $453 million (U.S.) penalty to settle an investigation into rate-rigging. Other banks remain under investigation.
Carney said the financial stability board could consider a system that relies more on existing market rates.
He said he has already spoken to some authorities about the future direction of Libor and that it would be addressed by the board at its next meeting in Basel, Switzerland on Sept. 9.
“If Libor can’t be fixed, which is a possibility, there may be different types of approaches,” he said. “We need to think that through.
“There’s an attraction to moving toward more market based rates, if possible,” he added. “They may be different in different jurisdictions.”
In the U.S., he said, that could include the “repo rate” which is short for repurchase agreement, or the OIS, which stands for overnight indexed swap.
In Canada, it could mean sticking with CDOR, the Canadian Dealer Offered Rate.
Meanwhile, some banks have already pulled out of Libor, but Carney said he believes most banks will remain in the system.
“The best institutions do recognize they have a responsibility to remain in these panels and to continue to post their estimates,” he said. “We should be careful not to tar all institutions in the panel with the actions of some.
“What they’ve been asked to do is faithfully estimate the cost at which they borrow. It shouldn’t be that difficult to do and continue to do in the manner consistent with the requirements of the BBA and … with the expectations of the global financial community.”
Asked what he knew about Libor and when, Carney said he first became aware questions were being raised about the rate during the financial crisis of 2008 after seeing it in a few media reports.
At the time, most central bankers were more concerned about restoring financial stability to the markets, he said
In terms of the specific investigations now underway, he said he became aware in the spring of 2011 when the Commissioner of the Competition Bureau asked the Bank of Canada for some assistance on some technical matters.
The bank does not conduct investigations, he noted.
As for the details of the actual manipulation, Carney said he became aware of it in recent weeks after certain public disclosures were made about a specific institution.
Also yesterday, U.S. Treasury Secretary Timothy Geithner said he acted quickly and appropriately to deal with problems with LIBOR, once he realized the rate-setting process was flawed.
Geithner, then head of the Federal Reserve Bank of New York, said during an interview with CNBC that he sent a memo in 2008 to British banking authorities outlining his concerns about possible manipulation of the London interbank offered rate. He also said he alerted U.S. regulators.
As well, Japan’s banking lobby said it may review lenders’ interest-rate submissions and South Korean regulators started a probe into possible collusion in money markets, amid widening global scrutiny of key lending rates following the Libor scandal in the U.K.
The Japanese Bankers Association said it’s considering looking at as many as 16 banks to confirm that they follow guidelines for submitting yen-denominated Tokyo interbank offered rates. In South Korea, the antitrust agency expanded an investigation today into whether local brokerages kept certificate of deposit rates artificially high.
Original Article
Source: the star
Author: Dana Flavelle
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