FSA admits not responding "rapidly" enough to Libor clues

Tuesday, 05 March 2013 03:19

The Financial Services Authority (FSA) has admitted that it knew about the rigging of the interbank lending rate years before it launched an investigation in 2010.

The FSA has published its own internal investigation into its own handling of the scandal and has admitted that between the summer of 2007 and early 2009, employees “at all levels of management” knew about the scandal ahead of the launch of a formal investigation in 2010.

The Libor interbank rate-rigging scandal saw Barclays fined a total of £290 million by US and UK regulators.

The benchmark rate which is used to calculate the interest rate attached to different financial products.

Following the imposition of the fine, Barclays was called to appear before a Treasury Select Committee at which the bank provided evidence of 13 instances of communication between Barclays and the FSA which should have shown the regulator that inappropriate Libor submissions were being made.

This prompted the FSA chief executive Adair Turner to launch an Internal Audit Report that examined 97,000 documents to find out about the extent of the rigging and interviewed 20 different former and current FSA staff.

In its report it found 26 different references to potential or actual lowballing, including two telephone calls from Barclays in March and April 2008 that the report described as "the clearest contacts that indicated an individual bank was lowballing".

It found that there was some indication that “lowballing” did occur but discovered no evidence that traders were manipulation the Libor rate for their own financial gain.

However, though the FSA concludes that there was no “major regulatory failure”, it admits that “the report “identifies important areas where the FSA should have performed better.

Lowballing saw banks submit low rates to try and avert negative publicity during the financial crisis that the banks may need a bailout from the state.

The FSA said that it had no procedure in place for checking Libor and that it was focusing on trying to understand the implications of severe market dislocation.

FSA chairman Adair Turner said: "As the financial crisis developed in 2007 to 2008, the FSA's bank supervisors were primarily focused on ensuring they understood the prudential implications of severe market dislocation. And the FSA had no formal regulatory responsibility for the LIBOR submission process.  As a result, the FSA did not respond rapidly to clues that lowballing might be occurring.”

The Royal Bank of Scotland (RBS) was fined £391 million for its role in the scandal and Swiss bank UBS was fined around £1 billion.

The Bank of England said in a statement that it was also aware of rumours of the Libor system not working properly and that it passed them onto the regulator.

The Bank of England said: "This report shows that, where the Bank was aware of market rumours about the process for setting Libor, it passed them promptly to the regulator – the FSA."

The FSA is to be shut down on March 31st 2013 and will be replaced by a new supervisory body of the Bank of England, the Financial Conduct Authority which will be led by Martin Wheatley who currently works for the FSA.

In its management response to the report, the FSA said that the British Bankers’ Association (BBA) did not raise concerns over the conduct of some of its members with the FSA.

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