UK: Professional & Financial Lines - October 2012

Last Updated: 10 October 2012
Article by James Cooper

LIBOR manipulation coverage

Investigations and regulator action

Bank of England Governor, Mervyn King has called for the reforms proposed in the Wheatley Report to be implemented quickly, although has highlighted that further reforms will be needed in the medium and long term for benchmarks which use transaction data. Greg Clark, financial secretary to the UK Treasury, has stated that Martin Wheatley's recently published recommendations should be approved early in 2013 to enable legislation to be enacted. The first stage of such LIBOR reform began in earnest on Monday, 1 October 2012, when a tender process commenced for institutions and groups to take over oversight of LIBOR from the British Bankers' Association (BBA).

Angela Knight, former head of the BBA, has come out in defence of the organisation and stated that she personally had made recommendations in 2008 that the Bank of England should become more involved in the oversight of LIBOR. This assertion appears to be corroborated by documents released by the Bank of England as part of the public inquiry into the LIBOR affair.

The Canadian central bank, the Bank of Canada, has stated that it will work with the UK in reforming LIBOR and ensuring a smooth transition to a more effective and transparent benchmark rate. One of the proposed reforms in the Wheatley Report was that the number of LIBOR reference rates should be reduced from 150 to 20, and this would include eliminating the Canadian-dollar LIBOR. The Bank of Canada, however, has stated that Canadian-dollar LIBOR rates are not widely used in pricing loans in Canada.

In line with the proposal to cut LIBOR reference rates, the Swedish Financial Supervisory Authority (Finansinspektionen) has said that plans to eliminate LIBOR reference rates for the Swedish kronor will have a minimal impact on contracts in Sweden. This is because there are a relatively small number of contracts actually based on LIBOR in the Swedish market. However, Finansinspektionen has said that it has engaged in discussions with the Swedish Bankers' Association as to changes which need to be made to the Stockholm interbank offered rate.

The Dutch justice department has requested information from Rabobank, the Dutch agricultural cooperative bank, following accusations that Rabobank helped to manipulate LIBOR between 2006 and 2009. Rabobank is a member of the panel which currently sets LIBOR. A spokesman for Rabobank has said that it is cooperating fully with the investigation.

Andrew Bailey, head of prudential regulation at the FSA, has stated that UK banks must not only lend more but also strengthen their balance sheets by raising new capital. Mr Bailey stated that one way to do this would be by issuing new shares to investors, with such further strengthening of capital positions helping to restore market confidence.

Two Senate Republicans have blamed a wave of lawsuits in the United States over the manipulation of LIBOR on the failure of Tim Geithner, Treasury Secretary, to inform the US public over concerns he had with the LIBOR rate-setting process. Republicans, Chuck Grassley and Mark Kirk have stated that Mr Geithner's decision not to take any action has contributed to the waves of litigation in the United States, although Mr Geithner did signal his concerns to British authorities at the time. Mr Grassley and Mr Kirk have also called for an American benchmark to be created to replace LIBOR. This echoes comments recently made by Gary Gensler, Chairman of the United States Commodity Futures Trading Commission, who said that LIBOR was in such a damaged state that it required "replacement surgery."

Former Federal Reserve Chairman, Paul Volcker, will address the UK Parliamentary Commission on Banking Standards on 17 October 2012, as part of British lawmakers' continued investigation into the behaviour of banks. Mr Volcker has advocated the introduction of new regulation in response to the financial crisis and is the creator of the "Volcker Rule" which aims to curb banks' proprietary trading.

David Cameron has spoken of the progress being made in light of reforms set out in the Wheatley Report, which show that Britain is "taking action" to restore confidence in the rate and in the market generally. David Miliband, speaking ahead of the Labour Party's annual conference, has vowed to introduce tough new banking laws should he win power, including the implementation of a tax on bankers' bonuses. Yvette Cooper, home-affairs spokeswoman for the Labour Party, has also called for the introduction of strict economic-crime laws to help prevent financial scandals such as the LIBOR affair.

Industry Response

Market participants are understood to feel that the LIBOR reforms announced last week in the Wheatley Report will be unlikely to have much of an impact on the market in the short term, and that funding rates will become volatile. Efforts to improve market confidence will likely also increase borrowing costs for consumers. Further, there are questions over the proposal to increase the number of banks which sit on the panel that contributes rates to LIBOR, as it is argued that rates will increase if banks with lower ratings are added. Stakeholders are also concerned that conflicts of interest might emerge if banks are added to the panel which also operate large rate swap books, although the Wheatley Report proposals included increased regulatory oversight to manage these sorts of issues. The banks which sit on the panel will be selected by the new administrator, as proposed in the Wheatley Report.

In order to restore market confidence, Stephen Hester, chief executive at RBS, has said that banks need to undertake large-scale changes to their culture and re-focus on corporate responsibility, in particular on meeting the needs of their customers. These changes would help to discourage practices such as rate manipulation. Speaking at the London School of Economics, Mr Hester also said that he welcomed the proposed changes to the LIBOR process, although he felt that such changes could have been implemented earlier.

Barclays coverage


An advisory group of experts, led by Bank of Finland Governor, Erkki Liikanen, has called for traditional deposit-taking business in the EU to be separated from riskier investment arms and other high risk activities, in order to ring-fence customer deposits and protect them from failures in other areas of the business. This inquiry group was set up following a request from EU regulators to undertake a review of EU banking structures and provide proposals for reform. EU regulators are unlikely to accept the proposals, however, and industry participants have criticised the proposals as well. Banks such as Barclays would be impacted by such reform, as it engages in retail banking alongside other riskier trading in equities and debt. It is expected that regulators will instead require the implementation of safeguards such as an increase in capital reserves, rather than exploring complicated structural changes.

Barclays has made changes to its executive committee by promoting two of its consumer banking bosses. Mr Ashok Vaswani will assume the role of global head of retail and business banking products and services, widening his current UK role. Mr Vaswani will be joined on the executive committee by Barclaycard Chief Executive Officer, Valerie Soranno Keating. These changes reflect the new group CEO's focus on traditional banking.


Much of the international press coverage this week has unsurprisingly been focused on the UK's high profile Wheatley report, following a fairly rapid review of a number of aspects relating to the setting and use of LIBOR. Wheatley draws three fundamental conclusions to underpin his recommendations in the report: (1) we need to reform, rather than replace, LIBOR (motivations for which are no doubt aligned to not wishing the U.S. to create a new global benchmark for us); (2) transaction data should be used to support and verify LIBOR submissions; and, (3) market participants should continue to play a significant role in the production and oversight of LIBOR.

Wheatley has had to choose his words carefully, not least since he faces opposition from almost every corner of the globe on many aspects of his proposed reforms. The fact that he and Gensler are co-heading an IOSCO task force to look at alternatives to LIBOR may provide some comfort in that the Americans may not ultimately have it all their own way.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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