When Anthony Browne accepted the job of Chief Executive Officer of the British Bankers’ Association in June, it had responsibility for the world’s most important benchmark interest rate. Following the Libor-rigging scandal, it is likely to be little more than just another lobby group.
Regulators and lawmakers are weighing whether to strip the lobby group of its role overseeing the setting of Libor, the reference for more than $500 trillion of securities, after a worldwide probe into at least a dozen banks showed some had tried to rig the rate. U.S. Treasury Secretary Timothy Geithner and the Bank of England have both faulted the BBA for failing to fix Libor in 2008 when the Bank for International Settlements first raised concern that the benchmark was being manipulated.
“They haven’t handled themselves at all well, in particular on Libor but also on a lot of wider banking issues,” said Ismail Erturk, a banking lecturer at Manchester Business School. “The BBA isn’t up to the job of defending or promoting London’s position as a financial center.”
Libor is the latest of a series of scandals to hit Europe’s biggest financial center this year: regulators have forced banks to compensate customers improperly sold insurance on loans, and are probing the mis-selling of derivatives to consumers. HSBC Holdings Plc and Standard Chartered Plc, two of the country’s five biggest lenders, are being accused by U.S. regulators of flouting anti-money laundering regulations.
The BBA represents more than 200 banks and lobbies policy makers and regulators on behalf of the industry. Browne, who was previously head of European government relations at Morgan Stanley, will join the group on Sept. 1, replacing Angela Knight, the former Conservative lawmaker who’s held the post for the past five years.
Under Knight, the BBA defended bankers’ compensation as firms received government bailouts. It was also forced in 2011 to drop a court bid to prevent banks from having to compensate clients over payment protection insurance.
Customers were in some cases forced to buy, or didn’t know they had purchased, insurance to cover repayments on credit cards or mortgages they were taking out. Lloyds Banking Group Plc, HSBC, Barclays Plc and Royal Bank of Scotland Group Plc have since apologized and earmarked more than 8 billion pounds ($13 billion) in compensation.
“It would be difficult to come up with anything positive to say about the BBA to be honest,” said Tim Price, who helps oversee more than $1.5 billion at PFP Group LLP, an asset-management firm based in London.
In the meantime the group is still searching for a replacement chairman after Marcus Agius, who held the same role at Barclays, stepped down from both jobs after regulators fined his bank a record 290 million pounds for rigging the rate.
John Ewan, who oversaw Libor for the BBA, left in July to join Thomson Reuters Corp., which calculates the benchmark on behalf of the lobby group. Bloomberg LP, the parent of Bloomberg News, competes with Thomson Reuters in selling financial and legal information and trading systems.
The BBA last month canceled its annual black-tie dinner for the first time and scrapped its summer party after the Barclays fine. About 300 guests from the financial district were slated to attend the dinner at London’s Mansion House.
Knight didn’t return a message left on her mobile phone. Browne declined 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, which is likely to be the BBA, so in a way its function will always be there.”
The century-old BBA helped to introduce Libor in January 1986 to cement London’s dominance in the markets for syndicated loans and interest-rate swaps. The benchmark is determined by a daily poll carried out on behalf of the BBA that asks banks to estimate how much it would cost to borrow from each other for different periods and in different currencies.
It may be hard to remove the BBA from having any role in the setting of Libor because some contracts, including loans, make specific reference to “the British Bankers’ Association interest rate,” according to Tony Katz, a lawyer at Orrick, Herrington & Sutcliffe LLP in London. “It may not be insurmountable but it is definitely a consideration,” Katz said in a telephone interview.
The BBA reviewed Libor in March 2008, after the BIS, the central bank for central bankers, questioned the accuracy of Libor quotes, suggesting that firms could be wary of disclosing their true borrowing costs.
“Banks’ quotes are determined by strategic behavior as well as credit quality and funding needs,” the BIS said in its quarterly review.
In response, the lobby group increased the number of banks on the dollar Libor panel to 20 from 16. Lenders were also asked to justify any discrepancies between their submissions and those of their competitors. The Bank of England, privately, was so underwhelmed by the BBA’s changes it pushed to have its name removed from the lobby group’s review.
“On governance, what the BBA say they will do seems broadly incrementally sensible as far as it goes, although we have concerns that they may not go far enough,” Bank of England official Michael Cross said in a June 4, 2008 note released on July 20 by the Bank of England as part of 80 pages of correspondence between the central bank and the New York Federal Reserve. “Given this, we might want to have direct and indirect references to the Bank (and the Fed) removed.”
After regulators began to probe Libor again last year, the BBA used the same playbook, starting another internal committee in March to review the benchmark. The panel included Barclays, RBS, HSBC, Credit Suisse Group AG and the Chicago Mercantile Exchange.
As recently as June, the panel was set to resist calls to overhaul the rate by basing it on actual transactions and was instead arguing for a beefed-up code of conduct and increased oversight, three people briefed on the talks said at the time.
After Barclays was fined on June 27, the U.K. Treasury took the matter out of the BBA’s hands, announcing on July 2 its own review into the Libor-setting process to be led by Financial Services Authority Managing Director Martin Wheatley.
Laying out the terms of the investigation on July 30, Wheatley said his team would consider “the appropriate governance structure for Libor” and whether participation in the setting of the rate should “be brought into the regulatory perimeter under the Financial Services and Markets Act 2000 as a regulated activity.”
The BBA said in an e-mailed statement this week that it would forward the findings of its own review to the FSA’s Wheatley.
“The absolute priority of everyone involved in this process is to ensure the provision of a reliable benchmark which has the confidence and support of all users, contributors and global regulators,” the BBA said in the statement.
Private, unregulated organizations such as the BBA shouldn’t be responsible for rates such as Libor, according to Geithner.
“We have to take a careful look at other parts of the financial system where the markets rely on private organizations composed of private firms like the BBA that have some quasi-regulatory or self-regulatory role,” he told the Senate Banking Committee in Washington on July 26. “As you’ve seen in this case we’ve got to be careful to make sure the system is not relying on associations of private firms that leave us vulnerable to the kind of things we’ve seen.”
Bank executives are also questioning the role of the BBA in overseeing Libor.
“The supervision of Libor has to be more neutral in the future,” Win Bischoff, chairman of Lloyds said on July 26 after the bank reported first-half earnings. “The BBA is a banking organization that assumed the rate-setting task, which is too onerous for it.”
The European Union is also pushing to have a role in the supervision of interbank lending rates. Michel Barnier, the EU’s financial services chief, said at a July 25 press conference in Brussels he will by the end of the year publish a plan to overhaul the governance of Libor, Euribor and other rates.
While the BBA has made mistakes in the past, they don’t necessarily rule it out from having a role in the future of the rate, Wheatley said at an Aug. 10 press conference in London.
“They have failed to pick up and respond to the signals early enough so I’m not confident the BBA’s historic role has been good,” Wheatley said. “Frankly it hasn’t. It still remains an open question as to whether from an industry perspective it’s still the best body to continue with that.”