This week marked an important step in clearing up that mess, regaining public trust, and changing the industry for good. We announced that we will transfer responsibility for the administration of Libor from the BBA to NYSE Euronext. The appointment of a new administrator – a London-based, UK registered company, regulated by the UK’s Financial Conduct Authority – was one of the key recommendations of the Wheatley Review, set up in the wake of the scandal to restore credibility to the index. It makes no sense for the industry’s trade association – funded by the banks – to oversee a rate to which so much of the banks’ business is pegged. Only by making the administrator completely independent can we rehabilitate Libor. This has been my top priority since taking over at the BBA.
But far from initiating the reform process, the transfer to the new administrator is but the latest step in a programme to fundamentally overhaul Libor by implementing the Wheatley recommendations. For example, we have simplified the rate to make sure it is more robustly based on underlying transactions and so more difficult to abuse. Last year, there were 150 different Libor rates – 15 maturities for each of ten currencies. However, the few underlying trades in some rates could in theory make those rates easier to manipulate. From the end of this month, only five currencies and seven maturities will be quoted every day (35 rates), making it more likely that the rates submitted are underpinned by real trades. The Danish, Swedish, Canadian, Australian and New Zealand Libor rates have been successfully terminated, without disruption to the financial markets.
Since the beginning of July, each individual submission that comes in from the banks is embargoed for three months. As Libor should be reflective of the rate at which contributor banks can borrow funds, embargoing individual submissions reduces the motivation to submit a false rate to portray a flattering picture of creditworthiness.
Knowingly or deliberately making false or misleading statements in relation to benchmark-setting was made a criminal offence last year. A new code of conduct, introduced by a new interim oversight committee, builds on this by outlining the systems and controls firms need to have in place around Libor. For example, each bank must now have a named person responsible for Libor, accountable if there is any wrongdoing. The banks must keep records so that they can be audited by the regulators if necessary. The administration of Libor has itself become a regulated activity, meaning the BBA has had to overhaul its own operations.
With the Libor scandal, the reputation of the banking industry reached its nadir. Now, Libor is being completely reformed. Recent years have already seen the most wide-reaching regulatory change to any industry, and more is on its way. The new administrator for Libor is an essential step in the rehabilitation of banking.
Anthony Browne is chief executive of the British Bankers’ Association.