Martin Wheatley published his final report into Libor this morning, concluding that though the rate should stay for practical reasons, it needs someone to ‘press the reset button’.
It would have sent a strong message out to scrap the rate and replace it with something new, but Wheatley feared that doing so would ‘pose an unacceptably high risk of significant financial instability, and risk large-scale litigation between parties holding contracts that reference Libor’. In other words, a rate whose failings caused chaos in the banking world would cause even more chaos if it disappeared. The report also noted that though significant damage has been done to its reputation, there has been no noticeable decline in the use of Libor since the scandal broke this summer.
The new-look Libor will be ironed so that many of the flaws which led to the widespread manipulation at banks should disappear. There is to be statutory regulation of Libor submissions. A new administrator will compile and distribute the rate, scrutinise submissions and periodically review Libor. Those submitting the rate will be subject to a new code of conduct, and the British Bankers’ Association should publish individual Libor submissions to make it less attractive to manipulate the rate.
Lady Hogg, head of the Financial Reporting Council, will now lead the selection process for the independent administrator of Libor. It is on this new body’s shoulders that the credibility of the overhauled rate – and the future success of the City of London – will rest. As we’ve warned on Coffee House before, other financial centres around the world are desperate to use scandals that emerge from what Vince Cable called the ‘cesspit’ as a means of undermining London for their own benefit. A rate that is not the plaything of irresponsible dealers, and a regulator that is not preoccupied with other events or ill-equipped to tell the difference between malfunctioning markets and dishonest ones are essential elements in the City’s survival.
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