EU promises change to scandal-tainted bank lending rate
By Benjamin Fox
The EU is planning an overhaul of inter-bank lending rates tainted by the Libor and Eurlibor rate-fixing scandals.
At a public hearing in the European Parliament on Monday (24 September), EU internal market commissioner Michel Barnier said that new rules on the calculation of interest rates would be presented before the end of 2012.
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He told MEPs that the European Commission is working with other international regulators to restore public trust in the system, which he described as a "public good."
He added that a radical "culture-change" is needed to get away from the "anything goes attitude of the financial sector."
The hearing was held against the backdrop of new EU-wide rules on market manipulation which are currently being negotiated by MEPs and ministers.
In July, the commission announced plans to widen the scope of the legislation to include criminal sanctions on rate fixing.
However, Gary Gensler, chairman of the US Commodity Futures Trading Commission, who spoke to MEPs via videolink, went further by indicating that Libor should be scrapped.
Gensler said that there are "no rules or controls to prevent banks from intentionally or unintentionally herding together to distort the rate." he added that "if Libor does not reflect genuine unsecured interbank lending then maybe we should move to a replacement."
He pointed out that the Libor rate had been unchanged from the previous day in 85 per cent of cases. "Given that markets are volatile, why is Libor so stable?" he asked.
The parliament committee hearing came after public outcry about the Libor scandal which has engulfed Europe and the US.
In the summer, the chief executive of British banking giant Barclays, Bob Diamond, was forced out after the bank was fined almost £300 million (€375 million) for its involvement in rate-fixing. More than 20 banks are now believed to be under investigation over their role in the affair.
The Libor index calculates the London inter-bank interest rate, based on self-reported borrowing costs on unsecured loans between banks. It also determines the price of an estimated $800 trillion worth of financial instruments.
For his part, Gensler also said that the rapid decline in the volume of inter-bank loans when money markets seized up during the financial crisis in 2008 and 2009 had increased the scope for abuse. He added that "collusion is less likely if Libor rates are anchored on real transactions."
Meanwhile, Dan Doctoroff, the chief executive of financial information service Bloomberg, told MEPs that his company is establishing its own "Blibor" indices based on a range of real credit information, including credit default swaps and short term maturity bonds.
He noted that a "widespread lack of transparency and reliable information contributed substantially to the crisis."
Meanwhile, EU competition chief, Joaquin Almunia, revealed that the EU executive is investigating a series of cases where bank cartels had colluded to artificially raise interest rates.
Almunia, who described the Libor scandal as another product of the "age of deregulation," told euro-deputies that the commission has already moved against rating agency Standard & Poor's and Thomson Reuters over restrictions they placed on the availability of their market information.
He added that the blame for rate-fixing does not lie solely with banks and that politicians and regulators also bear responsibility, however.