U.S. Commodity Futures Trading Commission (CFTC) chairman Gary Gensler has stated that the Libor interest rate is not yet free of fraud. Gensler said to the BBC in London that the rate was often “completely made up.” Many banks, within the past year, have been fined hundreds of millions of pounds for rigging the lending rate.
Libor and The FSA
Gensler was in London to meet officials and discuss Libor at the Financial Services authority. Libor, the London inter-bank offered rate, is a benchmark interest rate set each day by the British Bankers’ Association. It is based on estimates received from 16 major international banks based in London of how much they must pay in order to borrow cash from other banks. Libor is meant to reflect the average rate that banks pay to lend each other and is used to benchmark everything from car loans and mortgages to complex financial transactions around the world.
A Libor scandal emerged in June of last year when UK and US authorities fined Barclays £290m for fixing the key inter-bank interest rate. Since the scandal, Swiss bank UBS and Royal Bank of Scotland have been fined. Speaking to the scandal, Gensler mentioned “pervasive rigging,” saying authorities could not guarantee a fraud-free rate, though Gensler did refuse to criticize the FSA or suggest that setting the rate should be moved to the United States.
CFTCs Gensler at the BBC
Gensler, in a statement to the BBC, likened the manipulation of rates to an estate agent attempting to sell a house:
They are trying to reference the price of the houses in the neighborhood [when] there have been no transactions in the neighborhood and furthermore, the agent is not willing to share the data and is often just making it all up.
The BBA did not respond to Gensler’s comments, but stated to the BBC: “The BBA has strongly stated the need for greater regulatory oversight of Libor,” adding that it was working closely with the government and regulators to change the system.
A government commissioned review suggested placing responsibility in the hands of an outside authority such as a commercial body or an industry group, which would in turn place less emphasis on the BBA.