OTTAWA - Mark Carney says he intends to use his position as head of the international Financial Stability Board to take up the issue of reforming the scandal-plagued interbank lending system at the earliest opportunity.
The Canadian central banker said Wednesday he's already exchanged views with his counterparts in the world's leading economies and plans to discuss possible reforms in September, when FSB officials next meet.
Carney said he and U.S. counterpart Ben Bernanke agree that LIBOR, the London interbank offered rate — which sets terms under which banks lend each other funds and influences other interest rates — is structurally flawed.
"The facts that have emerged around the LIBOR situation are deeply troubling," he told reporters in Ottawa in his first public comments since the scandal over rate-rigging broke this spring.
"It's not just a structure of the index, which Chairman Bernanke rightly described yesterday as structurally flawed, but it's active, conscious, repeated manipulation of that index," he added.
"My personal view is that the public authorities have to play a leading role in determining what next with LIBOR and if not LIBOR, what else, because there has to be absolute confidence in this."
LIBOR has been discredited recently by evidence that some of the banks that set the benchmark have provided false information in order to support their positions as far back as 2008.
British bank Barclays shocked the financial world this spring when it agreed to pay a US$453 million fine for its part in the scandal.
But other banks are being implicated and investigations are proceeding in the United Kingdom, the U.S. and even Canada, where the Competition Bureau is using whistleblower information to try and pry documents from five branches of foreign-owned banks.
Carney said the Bank of Canada has provided "technical assistance" to the Canadian competition watchdog, but is not involved in the enforcement aspect of the issue.
It is not clear what can be done to fix the problem, he said, or whether the LIBOR benchmark system can be saved.
One criticism of LIBOR is that the benchmark is set from an average of a survey of banks' estimates about what rates they would have to pay for funds, rather than on the actual costs.
Another is that it is dependent on self-interested parties, namely the banks, to give an accurate appraisal of lending conditions and not let self-interest influence the reporting.
Carney has been a persistent critic of bank behaviour since the subprime meltdown in 2008 triggered the deepest economic collapse since the Great Depression, a crisis the world and Canada are still struggling to overcome. He has also been a leading advocate for reform, a position that helped him secure the prestigious position at the Swiss-based FSB, which acts as a kind of international policeman for the financial sector.
"The lessons are not being learned fast enough ... institutions need to substantially raise their game to levels of conduct that in any other level of life are expected," Carney said, expressing some frustration that banks may still be trying to rig the system.
"The policy issue is — where do we go from here?"
Carney said if LIBOR is structurally flawed and can't be fixed, there may need to be different approaches for different currencies.
"There is an attraction to moving to more market based rates if possible, that may be different in different jurisdictions," he explained, adding that "we may end up with different types of rates used in different currencies."
He made clear he was giving his personal views and that the FSB has as yet not formally discussed the issue.