British regulators have just proposed a ten point plan to overhaul a key global interest rate. But they say LIBOR — or London Interbank Offered Rate — shouldn’t be scrapped altogether because it’s too entrenched in the financial system.
LIBOR is used as a benchmark for trillions of dollars worth of transactions around the world, and at least a dozen major banks have been accused of rigging the rate. But there are also accusations that Britain’s central bank actually encouraged the manipulation.
Central bankers are supposed to be inscrutable. But when Paul Tucker, deputy head of the Bank of England, testified to parliament this summer he did not disguise his feelings or guard his tongue. “Cesspit!” he declared.
He was angrily dismissing a London based system for setting global interest rates. LIBOR is used as a benchmark for millions of financial transactions around the planet. LIBOR has been engulfed in scandal and at least a dozen major international banks, including Barclays, have been accused of rigging the rate for profit.
Paul Tucker’s anger is understandable. LIBOR is a “cesspit” into which both he and the Bank of England have been dropped. They have been accused of encouraging the rate rigging.
The accusation stems from a phone call that Tucker made to Barclays at the height of the financial crisis in the fall of 2008. He pointed out that Barclays’ borrowing costs under LIBOR seemed to be too big.
Ruth Bender of the Cranfield School of Management says this could be taken as an invitation to rig the rate.
“The implication could have been read into that that we would like LIBOR to be lower because if LIBOR is lower it sends a signal of confidence to the financial system that people still trust the banks,” says Bender.
Paul Tucker insists that this was not his intention and that his remarks were misunderstood. But at a time of crisis, isn’t it OK to tell a little white lie, to lie about LIBOR? Absolutely not, says analyst Ralph Silva.
LIBOR is the basis for more than $350 trillion worth of loans and mortgages and other financial contracts. It is far too important to be falsified, he says.
Just how important will become painfully clear to the banks if widespread manipulation is proven. Anyone who paid more for a loan or received less for a bank deposit as result of the rigging may be able to sue for compensation.