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.
The UK bank has been at the centre of a very public storm since U.S. and British authorities fined it more than $450 million last month for its part in manipulating Libor. The ensuing backlash cost chief executive Bob Diamond and chairman Marcus Agius their jobs. The pair have appeared before a parliamentary committee to testify about what went on at the bank, in a scandal which has drawn in British central bankers and government ministers.
BANK OF AMERICA
Bank of America is among the banks being investigated, a person familiar with the matter told Reuters last year. The bank did not comment in its 2011 annual report. It is one of 11 banks accused of conspiring to manipulate Libor in two lawsuits filed by discount brokerage and money manager Charles Schwab.
The Swiss Competition Commission said in February that Bank of Tokyo-Mitsubishi UFJ was among those it was investigating on suspicion of conspiring to manipulate rates. The Japanese bank did not comment on any probes in its 2011 annual report. This month, the group suspended two London-based traders as a result of a probe into manipulating interbank lending rates, but the bank said that was not to do with their conduct at BTMU. They had previously worked at Dutch lender Rabobank.
Citigroup said its subsidiaries had received requests for information and documents as part of investigations in various jurisdictions. The U.S. bank said it was cooperating. The bank is also subject to a number of private lawsuits filed in the U.S. against banks that served on the Libor panel. In December, Japan's financial regulator said it would penalise the Japan securities units of Citigroup and UBS after finding that an individual who worked at UBS and then moved to Citi had, along with his boss at Citi, attempted to influence the Tokyo interbank offered rate (Tibor).
Credit Suisse is one of 12 banks being investigated by the Swiss Competition Commission about alleged collusive behaviour among traders to influence the bid ask spread for derivatives tied to Libor and Tibor as well as the rates themselves. Credit Suisse said it was cooperating fully.
The German bank said it was cooperating with investigations in the United States and Europe in connection with setting rates between 2005 and 2011. It has had civil actions filed against it in the United States related to the setting of Libor. Germany's market regulator has launched a probe into the bank over suspected manipulation of interbank lending rates, sources have said. Results are expected in mid-July. German magazine Der Spiegel reported, citing no sources, that two Deutsche Bank employees have been suspended after external auditors examined whether staff were involved in manipulating rates.
Lloyds said it was cooperating with investigations. It has also been named in private lawsuits in the U.S. related to the setting of Libor. It said it 2011 annual report that it could not predict the ultimate outcome of investigations or lawsuits. In May, the bank said two derivatives traders had been suspended following an investigation into possible interest rate manipulation.
HSBC has said it received demands from regulators for information in connection with Libor investigations and it was cooperating. It has also been named in lawsuits related to Libor in the United States. HSBC said in its 2011 annual report that it could not predict the outcome of the investigations and lawsuits.
The bank, now a subsidiary of Lloyds, said it was cooperating with investigations. It has also been named in private U.S. lawsuits related to the setting of Libor. HBOS said it in its 2011 annual report it was not possible to predict the scope, outcome or impact of the investigations and lawsuits.
JPMorgan said it was cooperating with regulators and government bodies investigating the setting of Libor, Euribor and Tibor rates, mainly in 2007 and 2008. It has also been named as a defendant in private U.S. lawsuits over Libor.
Rabobank said it was cooperating with investigations into possible manipulation of Libor rates. It has also been named as a defendant in a number of civil lawsuits in the United States. Rabobank said it was confident the claims would be held unfounded and was conducting its defence as such.
Canada's largest bank did not make any comment in its 2011 annual report on its involvement in regulatory probes into possible manipulation of interbank lending rates.
Royal Bank of Scotland said it was cooperating with investigators, who had requested information. RBS said members of its group had been named as defendants in a number of lawsuits in the United States. The bank said it had substantial defences to these claims. Following a newspaper report last month that it faced a 150 million pound fine, RBS said there could not be any certainty as to the timing or amount of any fine or settlement.
The Swiss bank said it had been granted leniency or immunity from potential violations by some authorities, including the U.S. Justice Department and Swiss Competition Commission, in return for its cooperation in the Libor manipulation probe. It did not specify what information it was providing. In December, Japan's financial regulator said it would penalise the Japan securities units of Citigroup and UBS after finding that an individual who worked at UBS and then moved to Citi had attempted to influence Tibor. It has also been the subject of U.S. lawsuits.
The German bank was among those being investigated, a person familiar with the matter told Reuters in March last year. The bank made no mention of the probes in its 2011 annual report. In July last year it was dropped, at its request, from the panel of banks contributing to daily fixings of Libor for U.S. dollars.
The Japanese bank did not mention the investigations into possible Libor manipulation in its 2011 annual report. In April last year it was one of 12 banks sued by Vienna-based asset manager FTC Capital, accused of conspiring to manipulate Libor.