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The LIBOR allegations could affect the Bank of England's credibility

 

13th April 2017  - Juan Castañeda's comments about the LIBOR allegations in 2008.

Our Director was quoted in an article published by S&P Global Market Intelligence. Here is the full piece:- 

Bank of England credibility on the line amid LIBOR allegations

By Sophia Furber

The Bank of England risks losing credibility if allegations of interfering with the setting of market interest rates are true, industry observers say.

An investigation by the BBC's Panorama program cites a recording from 2008 in which Barclays Plc manager Mark Dearlove told colleague Peter Johnson to lower his LIBOR submissions, saying the bank was under "serious pressure" from the U.K. government and the BoE to do so.

LIBOR, or the London Interbank Offered Rate, is the average rate at which certain commercial banks are willing to lend to one another, and is used as a benchmark for pricing loans and mortgages.

"The case has just opened and we do not know at this stage what actually happened, but if these allegations prove to be true, it would be very damaging reputationally to the Bank of England," Laith Khalaf, a senior analyst at stockbroker Hargreaves Lansdown and a regular commentator on U.K. financial institutions, said in an interview.

Besides determining monetary policy, the BoE is responsible for the regulation and supervision of banks in the U.K.

But it is not just the BoE's reputation that could be on the line, Khalaf added. Commercial banks, and even individuals who have taken out products linked to LIBOR, could seek recompense from the central bank, he said.

Other banks have been sued for LIBOR offenses in the past, and it would not be a stretch to think that the Bank of England could face lawsuits if it is indeed found to have been complicit in LIBOR fixing, Khalaf said.

In July 2012, Barclays said it had been told by the BoE in October 2008 that its LIBOR submissions were higher than they needed to be and that it subsequently lowered its rates in order to protect itself from "negative perceptions." The phone call in the BBC documentary was made Oct. 29, 2008, the same day that former Barclays CEO Bob Diamond discussed Barclays' LIBOR rate with Paul Tucker, who went on to become the BoE's deputy governor.

Juan Castañeda, a director at the Institute of International Monetary Research at the University of Buckingham, said that the allegations, if found to be true, would raise "very serious concerns" about the credibility of the central bank and would raise questions about the trust of the general public in the banking sector.

"Our monetary system is purely based on trust and the record and effectiveness of the BoE and the rest of the banking sector," he told S&P Global Market Intelligence by email.

"The alleged pressure of the government and the BoE to keep LIBOR rates artificially low back in the autumn of 2008, in an effort to send the message that banks and money markets were not that disrupted, erodes the sound functioning of markets and the formation of interest rates, which are key signals for households and companies in planning their decisions."

A better strategy for the BoE would have been to focus more on its role as a lender of last resort, for example by extending the maturity of loans made to banks, rather than trying to prevent a liquidity crisis by interfering — as alleged — in the setting of LIBOR, Castañeda said.

The Bank of England said in an emailed statement that LIBOR setting was not regulated in the U.K. at the time the phone call recorded by the BBC allegedly took place, but that nevertheless, it was cooperating with the Serious Fraud Office's criminal investigations into LIBOR manipulation by employees at commercial banks.

The conversation about interference with LIBOR has been centered largely on the actions of commercial banks up until now, but the claims made by the BBC in its investigation could "conceivably" shift the focus on to the role of the Bank of England, Ian Gordon, a London-based banks analyst at Investec, said in an interview.

(You can read the original here)