Sir Mervyn King, governor of the Bank of England, has been put at the centre of the Libor-rigging scandal after a senior US official called on him to reform the interest rate market in 2008.
Timothy Geithner, who was then the president of the Federal Reserve Bank of New York, called for six changes he said would improve the integrity of Libor, the London interbank offered rate which is used around the world to set the rate of borrowing for many households and companies.
Geithner, who is now the US treasury secretary, sent his memo in June 2008. The memo, published by the Bank of England on Friday (pdf), shows that the recommendations made by Geithner came before October 2008 when Barclays was found to have lowered its Libor submissions to ensure there was no suggestion that it was in financial difficulty during the banking crisis.
The Bank appeared to pin the blame on the British Bankers’ Association, which compiles Libor. The Bank said on Friday that a review of Libor was launched by the BBA in June 2008 in the light of “concerns about difficulties in setting Libor in the stressed market conditions of late 2007 and 2008”. The governor endorsed Geithner’s recommendations.
“Both the Bank and the Federal Reserve were assured by the BBA that it would take on board the recommendations, either through actions or through questions on which it would consult,” the Bank said.
News of the existence of Geithner’s memo comes ahead of King’s appearance before MPs on the Treasury select committee on Tuesday, when he has been called to talk about financial stability but is expected to also face questions about Libor.
His role in the departure of Bob Diamond from Barclays was exposed earlier this week when the chairman, Marcus Agius, told MPs how he had been summoned to see King to learn that regulators no longer had confidence in the chief executive.
One of Geithner recommendations was a call to “eliminate incentive to misreport” the rates, which a £290m fine imposed on Barclays showed had been manipulated by traders since 2005 offering each other bottles of champagne and quips such as “this one is for you big boy”.
Geithner wanted the BBA to collect quotes from banks but randomly select the banks included, rather than striking out the highest and lowest.
Geithner’s concerns about Libor have already been revealed. He held a meeting on 28 April 2008 titled Fixing Libor that was attended by other Fed officials.
At a press conference last month, King was asked about Libor and explained that there had been discussions to reform the system in 2008 but “there was very little support at that stage among the markets, among banks and, indeed, among our overseas colleagues to make the change to the system”. He said the Bank was prepared to “take the lead” in any changes needed now.