When Anthony Browne accepted the job of Chief Executive Officerof the British Bankers' Association in June, it had responsibilityfor the world's most important benchmark interest rate. Followingthe Libor-rigging scandal, it is likely to be little more than justanother lobby group.

Regulators and lawmakers are weighing whether to strip the lobbygroup of its role overseeing the setting of Libor, the referencefor more than $500 trillion of securities, after a worldwide probeinto at least a dozen banks showed some had tried to rig the rate.U.S. Treasury Secretary Timothy Geithner and the Bank of Englandhave both faulted the BBA for failing to fix Libor in 2008 when theBank for International Settlements first raised concern that thebenchmark was being manipulated.

“They haven't handled themselves at all well, in particular onLibor but also on a lot of wider banking issues,” said IsmailErturk, a banking lecturer at Manchester Business School. “The BBAisn't up to the job of defending or promoting London's position asa financial center.”

Libor is the latest of a series of scandals to hit Europe'sbiggest financial center this year: regulators have forced banks tocompensate customers improperly sold insurance on loans, and areprobing the mis-selling of derivatives to consumers. HSBC HoldingsPlc and Standard Chartered Plc, two of the country's five biggestlenders, are being accused by U.S. regulators of floutinganti-money laundering regulations.

The BBA represents more than 200 banks and lobbies policy makersand regulators on behalf of the industry. Browne, who waspreviously head of European government relations at Morgan Stanley,will join the group on Sept. 1, replacing Angela Knight, the formerConservative lawmaker who's held the post for the past fiveyears.

Under Knight, the BBA defended bankers' compensation as firmsreceived government bailouts. It was also forced in 2011 to drop acourt bid to prevent banks from having to compensate clients overpayment protection insurance.

Customers were in some cases forced to buy, or didn't know theyhad purchased, insurance to cover repayments on credit cards ormortgages they were taking out. Lloyds Banking Group Plc, HSBC,Barclays Plc and Royal Bank of Scotland Group Plc have sinceapologized and earmarked more than 8 billion pounds ($13 billion)in compensation.

“It would be difficult to come up with anything positive to sayabout the BBA to be honest,” said Tim Price, who helps oversee morethan $1.5 billion at PFP Group LLP, an asset-management firm basedin London.

Marcus Agius

In the meantime the group is still searching for a replacementchairman after Marcus Agius, who held the same role at Barclays,stepped down from both jobs after regulators fined his bank arecord 290 million pounds for rigging the rate.

John Ewan, who oversaw Libor for the BBA, left in July to joinThomson Reuters Corp., which calculates the benchmark on behalf ofthe lobby group. Bloomberg LP, the parent of Bloomberg News,competes with Thomson Reuters in selling financial and legalinformation and trading systems.

The BBA last month canceled its annual black-tie dinner for thefirst time and scrapped its summer party after the Barclays fine.About 300 guests from the financial district were slated to attendthe dinner at London's Mansion House.

Knight didn't return a message left on her mobile phone. Brownedeclined to comment.

“The BBA's reputation has been damaged by the Libor scandal,”said Richard Werner, a lecturer at the University of Southampton.But there is likely to always be a lobby group for the banks, whichis likely to be the BBA, so in a way its function will always bethere.”

The century-old BBA helped to introduce Libor in January 1986 tocement London's dominance in the markets for syndicated loans andinterest-rate swaps. The benchmark is determined by a daily pollcarried out on behalf of the BBA that asks banks to estimate howmuch it would cost to borrow from each other for different periodsand in different currencies.

It may be hard to remove the BBA from having any role in thesetting of Libor because some contracts, including loans, makespecific reference to “the British Bankers' Association interestrate,” according to Tony Katz, a lawyer at Orrick, Herrington &Sutcliffe LLP in London. “It may not be insurmountable but it isdefinitely a consideration,” Katz said in a telephoneinterview.

The BBA reviewed Libor in March 2008, after the BIS, the centralbank for central bankers, questioned the accuracy of Libor quotes,suggesting that firms could be wary of disclosing their trueborrowing costs.

'Strategic Behavior'

“Banks' quotes are determined by strategic behavior as well ascredit quality and funding needs,” the BIS said in its quarterlyreview.

In response, the lobby group increased the number of banks onthe dollar Libor panel to 20 from 16. Lenders were also asked tojustify any discrepancies between their submissions and those oftheir competitors. The Bank of England, privately, was sounderwhelmed by the BBA's changes it pushed to have its nameremoved from the lobby group's review.

“On governance, what the BBA say they will do seems broadlyincrementally sensible as far as it goes, although we have concernsthat they may not go far enough,” Bank of England official MichaelCross said in a June 4, 2008 note released on July 20 by the Bankof England as part of 80 pages of correspondence between thecentral bank and the New York Federal Reserve. “Given this, wemight want to have direct and indirect references to the Bank (andthe Fed) removed.”

After regulators began to probe Libor again last year, the BBAused the same playbook, starting another internal committee inMarch to review the benchmark. The panel included Barclays, RBS,HSBC, Credit Suisse Group AG and the Chicago MercantileExchange.

As recently as June, the panel was set to resist calls tooverhaul the rate by basing it on actual transactions and wasinstead arguing for a beefed-up code of conduct and increasedoversight, three people briefed on the talks said at the time.

After Barclays was fined on June 27, the U.K. Treasury took thematter out of the BBA's hands, announcing on July 2 its own reviewinto the Libor-setting process to be led by Financial ServicesAuthority Managing Director Martin Wheatley.

Laying out the terms of the investigation on July 30, Wheatleysaid his team would consider “the appropriate governance structurefor Libor” and whether participation in the setting of the rateshould “be brought into the regulatory perimeter under theFinancial Services and Markets Act 2000 as a regulatedactivity.”

Wheatley Response

The BBA said in an e-mailed statement this week that it wouldforward the findings of its own review to the FSA's Wheatley.

“The absolute priority of everyone involved in this process isto ensure the provision of a reliable benchmark which has theconfidence and support of all users, contributors and globalregulators,” the BBA said in the statement.

Private, unregulated organizations such as the BBA shouldn't beresponsible for rates such as Libor, according to Geithner.

“We have to take a careful look at other parts of the financialsystem where the markets rely on private organizations composed ofprivate firms like the BBA that have some quasi-regulatory orself-regulatory role,” he told the Senate Banking Committee inWashington on July 26. “As you've seen in this case we've got to becareful to make sure the system is not relying on associations ofprivate firms that leave us vulnerable to the kind of things we'veseen.”

Bank executives are also questioning the role of the BBA inoverseeing Libor.

“The supervision of Libor has to be more neutral in the future,”Win Bischoff, chairman of Lloyds said on July 26 after the bankreported first-half earnings. “The BBA is a banking organizationthat assumed the rate-setting task, which is too onerous forit.”

The European Union is also pushing to have a role in thesupervision of interbank lending rates. Michel Barnier, the EU'sfinancial services chief, said at a July 25 press conference inBrussels he will by the end of the year publish a plan to overhaulthe governance of Libor, Euribor and other rates.

While the BBA has made mistakes in the past, they don'tnecessarily rule it out from having a role in the future of therate, Wheatley said at an Aug. 10 press conference in London.

“They have failed to pick up and respond to the signals earlyenough so I'm not confident the BBA's historic role has been good,”Wheatley said. “Frankly it hasn't. It still remains an openquestion as to whether from an industry perspective it's still thebest body to continue with that.”

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