The Bank of England missed a chance to help reform Libor in 2008, the banking group responsible for the scandal-struck interest rate said on Friday, crossing swords with Britain's powerful central bank.
For its part the BoE defended its hands-off role, publishing emails from 2008 showing it had urged reform of Libor, used as a benchmark in financial contracts worth hundreds of trillions of dollars, and now at the heart of a global rate-rigging scandal.
"What we were doing was asking them to come on board. We wanted them to be engaged with the process, and they declined," Angela Knight, Chief Executive Officer of the British Bankers' Association (BBA) told Reuters.
Such public involvement of central banks would have increased market confidence in Libor, Knight said.
The BoE's emails showed that Governor Mervyn King, who in a parliamentary hearing this week came under fire for lax oversight of Libor during the credit crisis, had called the BBA's plans to overhaul the rate "wholly inadequate".
After pressure from the U.S. Federal Reserve, some tweaks were made late in 2008 to the way Libor is set, the emails between King, his deputy Paul Tucker and Knight show.
But the BoE insisted its name was removed from a policy paper by the BBA, which is responsible for Libor, and there is no evidence of any follow-up by the central bank or other regulators after the changes were made.
"There is a risk that references to us by name and to central banks generally are taken as implying endorsement of the particular approach that the BBA sets out," a June 4, 2008, internal BoE memo addressed to King shows.
The New York Federal Reserve was equally reluctant to be seen to be involved in the governance of Libor.
More than a dozen banks, including Citigroup, JPMorgan and Deutsche Bank are under investigation over suspected rigging of the benchmark rate, but the recent hearings in the United Kingdom have also put the spotlight on regulators.
Tucker was drawn into the scandal when Barclays published a summary of a discussion between him and the bank's former Chief Executive Bob Diamond which appeared to contain an instruction from Tucker to lower the bank's Libor submission.
Both Tucker and Diamond have since denied that the former had given such an instruction. But Jerry del Missier, who quit as chief operating officer from Barclays, said this week he had read Diamond's email as an instruction to lower the rate.
Libor, or the London Interbank Offered Rate, is an estimate of how much it costs banks to borrow money from each other and is widely used in financial contracts. This became problematic when banks stopped lending in the crisis.
The BoE said its communications with the BBA started after King and Timothy Geithner, then head of the New York Federal Reserve, talked about the issue in Basel, home to the Bank for International Settlements.
It turned out that the BBA had already started an internal debate about whether Libor was still adequate.
But in a hand-written note on one of the emails, King said: "This seems wholly inadequate. What shall we do?"
The Fed also thought the changes didn't go far enough. There was then more discussion about the BBA's paper, and both central banks gave the draft their broad blessing, though some points were left open for further work.
"It was not appropriate for the public authorities to endorse or determine the outcome of the BBA review," the BoE said in a press release accompanying the emails.
"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," it said.
Thomson Reuters Corp. is the BBA's official agent for the daily calculation and publishing of Libor. The company said it continues to support the BBA in calculating and distributing Libor rates.
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