LIBOR sytem 'structurally flawed': Bernanke
July 19, 2012, 12:18 am TWN
WASHINGTON -- Federal Reserve Chairman Ben Bernanke on Tuesday said that revelations a key interbank lending rate had been rigged were “very troubling,” undermined confidence in the financial system and should be fixed.
Speaking to Congress, Bernanke said the disclosures, which have resulted in a large fine for British bank Barclays, showed the so-called LIBOR system was “structurally flawed.”
Under current rules, a small panel of banks submits an unregulated estimate of what they would pay to borrow from each other.
A central range is then found for the rate — which underpins the cost of everything from mortgages to credit cards.
“LIBOR is a critical benchmark to many financial contracts,” Bernanke told U.S. lawmakers.
“The actions of traders and banks that have been disclosed are not only very troubling in themselves, but they have the effect of undermining markets,” Bernanke said in testimony to the Senate Banking Committee.
Emails, phone transcripts and internal reports released last week by the New York Fed show the regulator was explicitly told banks were misstating their input to the LIBOR interbank lending rate.
“We'll get more information on that as the investigations continue, but it's clear that beyond these disclosures that the LIBOR system is structurally flawed and part of the response was to address those flaws.”
Emails also show that the New York Fed — which is tasked with assessing the safety and soundness of U.S. banks — in June 2008 shared its concerns with the Bank of England, which regulates the territory where the LIBOR is set.
Bernanke said that because “a relatively small number of changes” were actually adopted by the British authorities, he could not vouch for the reliability of the rate today.
Facing questions about why the Fed did not do more, Bernanke indicated that finding specific wrongdoing was difficult based on the information the Fed had.
He pointed out that banks did not appear to be manipulating the rate for profit and money did not always change hands amid a lack of liquidity in markets during the financial crisis.
Barclays's fines paid to U.S. and British regulators related to the manipulation of products derived from LIBOR, rather than the manipulation of the rate itself.