21 January 2014

Bloomberg: Merkel allies call for tough EU response to Libor-fixing scandal

The comments by two senior members of Chancellor Angela Merkel’s Christian Democratic Union party are the first indication of the German government’s response to revelations of banks’ manipulation of the London interbank offered rate, or Libor. Both lawmakers called for more transparency and the introduction of an overhauled system for rate-setting that allows for independent verification.

“The manipulation of interest rates that we’ve witnessed has shown that regulation is unavoidable", Ralph Brinkhaus, a deputy CDU leader in the lower house of parliament in Berlin, the Bundestag, said in an e-mailed response to questions. “We need better oversight and a new system for setting the Libor benchmark.”

“Many members of the German Bundestag are outraged by the practices of the banks in the Libor scandal", Klaus-Peter Flosbach, a CDU lawmaker who specialises in finance policy, said in an interview.

As Europe’s biggest economy, Germany’s stance also adds urgency to a wider debate underway between European Union states and in the European Parliament on how far to push their regulatory zeal. Flosbach, a former parliamentary finance spokesman for Merkel’s bloc, said that while the benchmark shouldn’t necessarily be fixed by the state, state supervision “should be introduced". “The European Securities and Markets Authority would be an appropriate supervisory body to be involved in the oversight", he said. Flosbach’s stance is broadly in line with that of Barnier, who proposed tougher supervision of rate-setting whereby “critical benchmarks” such as Libor would be overseen by colleges of national regulators that would also include ESMA.

Germany’s top financial regulator wants Barnier to go further because the plan relies too much on self-control. The Commission proposal to regulate reference values​ goes “in the right direction, but not far enough", Elke König, the president of Bonn-based BaFin, said in a January 16 speech.  She emphasised that when it comes to transparency and control there was still a lot of catching up to do and regulation alone would not be sufficient. "I do not believe that we are facing an all-encompassing coarsening but I do think that we have to return to certain ethical values that seem to have gone out of style in some parts of the financial sector during the boom times", she said.

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Global market overhaul

BaFin has proposed shifting trading of commodities and currencies on to regulated venues because of concerns about manipulation of benchmarks. “It would make it far easier to detect trading patterns that manipulate prices", said König in a phone interview on January 23. The idea is to move such transactions “as much as possible to transparent trading centers under state supervision, as is the case with securities".

König’s suggestion for an overhaul of the financial markets is the most radical since the Libor rate-fixing scandal set off global investigations. While “an admittedly very far-reaching idea", she said it could be tackled in stages.

“The question of how to tighten oversight of benchmarks is a matter of intense discussion, particularly at the international level", said König, adding that the topic is on the agenda of the Financial Stability Board.

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Meanwhile the BBA's board voted unanimously to approve the transfer of the administration of Libor to the new administrator on 1 February, 2014. BBA will hand over administration of the benchmark on 1st February 2014 following FCA approval.

The appointment of a new administrator was one of the key recommendations of the Wheatley Review which was set up in 2012 following the revelations of attempts to manipulate Libor. The BBA has worked hard to implement all the recommendations of the review in order to restore confidence in Libor as a benchmark.

Commenting on the announcement, BBA Chief Executive Anthony Browne said: “The BBA worked closely with the Wheatley Review into Libor, then with the Hogg Committee and latterly with ICE Benchmark Administration Ltd. Today's announcement is a further step in restoring the credibility of the rate. The BBA has strongly stated the need for greater regulatory oversight of Libor, and tougher sanctions for those who try to manipulate it. That is why the BBA Council agreed that responsibility for Libor should no longer lie with the BBA. The benchmark now has better regulatory oversight and improved governance.”

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