European Union authorities should directly oversee the euro interbank lending rate following the interest-rate manipulation scandal in London, the head of the banking group that administers Euribor said.
The European Securities and Markets Authority should supervise how banks submit estimates of interest rates to borrow or lend to one other, Guido Ravoet, the chief executive officer of the European Banking Federation, said in an interview today.
Confidence in the London interbank offered rate, or Libor, a benchmark for 360 trillion of dollars’ worth of financial products worldwide, has been dented by Barclays Plc (BARC)’s admission that it submitted false rates. Robert Diamond, who resigned as London-based Barclays’s CEO after the bank was fined 290 million pounds ($447 million), told British lawmakers last week that other banks also lowballed Libor submissions.
Barclays’s submitters received at least 58 requests for how they should report the Euribor rate from September 2005 to May 2009, 20 of them from traders at other banks, the U.K. Financial Services Authority said last month. Short-term interest-rate contracts valued at 241 trillion euros ($293 trillion) are based on the three-month Euribor futures contract, making it the world’s fourth-largest interest-rate futures contract by volume, the FSA said.
Ravoet said he remains confident that Euribor rates weren’t successfully manipulated because of the difficulty of coordinating rates between the 44 banks on the panel. During the 2007 financial crisis, the Euribor rate “went dramatically up, reflecting the tensions in the euro interbank market,” he said.
There should be more scrutiny of Euribor, and the EBF has no problem sharing information on the rates, Ravoet said. The banking federation checks on banks that regularly appear among the highest or lowest 15 percent of quotes that are removed to calculate the daily average, he said. The organization’s members are national banking groups, including the British Bankers’ Association, which administers the Libor rate.
For supervising Euribor “there are only two possibilities, either the ECB or ESMA,” Ravoet said. ESMA would be more logical because the European Central Bank may face a conflict of interest due to its activities in liquidity markets, he said.
Since March, a group of U.K. bankers and regulators has been reviewing how Libor is set. The panel, established by the BBA, has resisted calls to overhaul the rate because structural changes risk invalidating trillions of dollars of contracts.
Bank of England Governor Mervyn King said last month that Libor should be based on actual transactions instead of banks’ estimates of lending rates to restore credibility.
Ravoet said it would be very difficult to get a real-time view of lending rates without using banks’ own estimates, because there isn’t any market agency that can deliver the data.
“I don’t know if you’d be able to get a benchmark” on the same day, Ravoet said. “Banks are interested in knowing what is the market today.”
While sanctions for attempted rate manipulation are “completely justified,” Ravoet said, banks’ internal auditors should be responsible for making sure that Chinese walls to separate traders and submitters are respected.
Efforts by banking groups to oversee Euribor and Libor are “not enough,” because the rates have become widely used benchmarks, EU spokesman Stefaan De Rynck said today. The European Commission is reviewing the governance of the rates and how they are calculated, De Rynck said.
David Cliffe, a spokesman at Paris-based ESMA, declined to comment. The regulator was set up by the EU in response the financial crisis.
EU antitrust regulators in October raided banks that offer financial derivatives linked to the Euribor rates, saying they were investigating possible collusion. The commission is probing
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