BBA ouster is right first step for Libor reform
By George Hay
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
So, farewell then, the British Bankers’ Association. The UK financial lobby group has signalled that it will not kick up a fuss should it lose its integral role setting and overseeing the London Interbank Offered Rate, or Libor. After a damaging global scandal in which it was revealed that banks routinely tried to fiddle the interest rate benchmark for trillions of dollars of international contracts, it’s an encouraging sign that reform will not be piecemeal.
It should come as no surprise that the BBA’s role is in jeopardy. The outrage that greeted the scandal shone a spotlight on the shortcomings of the Libor-setting process, which involves bankers submitting daily best estimates for 150 rates based on different maturities and currencies, overseen by a committee of more bankers. Martin Wheatley, the UK regulator due to report on the issue on Sept. 28, gave an indication of his thinking back in August: He described the current system as neither independent, robust, nor transparent.
It seems Wheatley won’t pull his punches. He could have meekly fallen into line with other recent attempts at reform, which generally looked to add non-bankers to the BBA committee in charge of Libor. With the BBA out of the picture, that role would probably either pass to a public body or to a more credible private group with stronger public sector oversight.
Yet even if Wheatley did deem Libor’s existing governance adequate, the benchmark would probably still have to change. That’s because he is also reviewing whether to base the rate on actual trade data rather than banks’ best estimates. If market data is to be used, that will in turn raise questions about how to set Libor when actual transactions don’t happen, as occurred during the financial crisis of 2007-2008.
The most critical calls for Libor’s future will be how to incorporate market data, whether there should be fewer rates overall, and how to diversify the rate-setting away from its traditional London base. Whatever package of reforms the UK regulator proposes will need strong global support, perhaps including the backing of the Financial Stability Board which represents some two dozen governments. Hopefully, Wheatley’s proposed Libor reforms will all be as robust as his expected ouster of the BBA.