Sir Mervyn King knew of Libor fears four years ago, e-mails reveal

By HOLLY WILLIAMS
Published on 14/07/2012 01:21

BANK of England Governor Sir Mervyn King has been dragged into the rate-rigging scandal after it emerged that he discussed concerns about Libor with a key US official at least four years ago.

An e-mail trail released by the Bank shows the then New York Federal Reserve president, Timothy Geithner, put forward a raft of proposals in June 2008 to reform the Libor – the London interbank offered rate – to prevent “accidental or deliberate misreporting”.

The correspondence confirms Sir Mervyn supported the proposals, as he wrote to Mr Geithner saying the recommendations “seem sensible to us”. He assured they would be put forward to the British Bankers’ Association (BBA) – which runs the system – to include in a review of Libor, according to the e-mails.

But the news raises questions over why the BBA and UK authorities did not get a handle on Libor fixing earlier.

The banking industry has been mired in controversy ever since news broke last month of Barclays’ £290 million settlement with US and UK regulators over its attempts to manipulate Libor between 2005 and 2009.

The scandal has already claimed the scalp of the bank’s chief executive Bob Diamond and chairman Marcus Agius, while it threatens to engulf many more banks as part of an ongoing global investigation.

Yesterday’s revelatory e-mails show Mr Geithner, now US Treasury Secretary, was pushing for reforms to improve the integrity of Libor and “establish a credible reporting procedure”. His memo outlined a six-point plan to overhaul the Libor process and strengthen governance.

The Barclays rate-rigging fine has prompted calls for a complete review of how Libor works. Presently, Libor is set on a daily basis by panels of banks, with each bank submitting the rates at which it believes it could borrow, every day.

The top and bottom quartile are thrown out, while the rest are averaged. But authorities are now looking at changes to ensure it is calculated by actual transactions.

The Bank of England said yesterday on publishing the e-mails: “Concerns about difficulties in setting Libor in the stressed market conditions of late 2007 and 2008 were widely expressed, including in the media, although no evidence of deliberate wrongdoing had been cited.”

It said the BBA had launched a review of the process in June 2008 and assured the Bank it would “take on board the recommendations” from Mr Geithner.

MP hearings with Barclays bosses and central bankers have revealed a trail of warnings over Libor, going back to the start of the credit crunch.

Bank deputy governor Paul Tucker was quizzed over when he was first aware of Libor rigging claims after it emerged the issue was raised five years ago at a little-known money markets committee run by the Bank of England.