The Bank of England favored having its name removed from the 2008 review of Libor by the British Bankers’ Association over concern its improvement of governance didn’t go far enough.
The view was contained in 80 pages of correspondence between the central bank and the BBA and the New York Federal Reserve on the London interbank offered rate. The documents were published today after a request earlier this week from U.K. lawmakers investigating the scandal over the global rate.
“On governance, what the BBA say they will do seems broadly incrementally sensible as far as it goes, although we have concerns that they may not go far enough,” Bank of England official Michael Cross said in a note to colleagues. “Given this, we might want to have direct and indirect references to the Bank (and the Fed) removed.”
The note is dated June 4, 2008, a week before the BBA published a consultation document on its review of Libor. In a response the same day, a memo says Bank of England Governor Mervyn King “agrees the BOE references should be removed and replaced with ‘all interested parties.’” King had said in a note dated May 31 that the BBA’s initial proposals seemed “wholly inadequate.”
King and Deputy Governor Paul Tucker have been questioned by lawmakers after London-based Barclays Plc (BARC) was hit with a record $451 million fine last month for its part in manipulation of Libor. The Bank of England initially became embroiled in the scandal over an October 2008 phone call between former Barclays’ Chief Executive Officer Robert Diamond and Tucker.
On June 26, 2008, King said Tucker, who at the time was markets director at the central bank, should “impress” on the BBA the “need for greater energy” on the Libor review.
Tucker must “make clear that we would not stand in the way of alternative market initiatives to provide alternatives to Libor,” King said in a handwritten message.
Contained into today’s release was an internal Bank of England document sent to Tucker on May 22, 2008, stating that the BBA, which oversees the setting of Libor, warned banks to submit honest rates on April 16, 2008. The spread between three- month dollar Libor and the overnight indexed swap rate widened 12 basis points in the three days following the warning, according to the note.
‘Close to Desperate’
The document to Tucker also said that because banks contributing Libor submissions have no obligation to trade, or to have traded, at the rates they give, “it is at least plausible that these are influenced by commercial incentives.”
Another e-mail from Cross to Tucker and others at the central bank says that BBA Chief Executive Officer Angela Knight is “close to desperate for even a small hook to imply that there will be a dialogue with central banks -- so there is a bit of a judgement to be made here on wider diplomacy and the relationship with the BBA.”
In a statement accompanying today’s release, the Bank of England said that because the Libor system “was, and is, a private sector arrangement and was not subject to financial regulation, it was not appropriate for the public authorities to endorse or determine the outcome of the BBA review.”
“When the amended proposals were adopted in December 2008, the bank was not aware of any dissenting views expressed by the official or private sectors,” the central bank said.
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