* Central bank urges rethink of how the benchmark is
* Actual lending rates could replace use of bank estimates
* ECB in frame to take on supervision of Euribor
By John O'Donnell and Marc Jones
FRANKFURT/BRUSSELS, July 18 The European Central
Bank is putting pressure on the organisers of Euribor for an
overhaul to shore up faith in the benchmark interest rate
following a scandal over the manipulation of the Libor standard,
sources familiar with the matter said.
The move chimes with Tuesday's warning from U.S. Federal
Reserve Chairman Ben Bernanke that the system for determining
the London interbank offered rate (Libor) is structurally
Manipulation of Libor, which is used to set prices for
trillions of dollars of financial products around the globe, has
landed British bank Barclays with a penalty of $453
million, claimed the scalp of its chief executive and threatens
to drag in several other banks.
Now the ECB is calling for a rethink on Euribor, including
possibly shifting the basis of the calculation to actual lending
rates instead of the current system, which like Libor's uses
banks' assessments of what they expect to be charged.
Regulators fear the existing set-up allows too much
The ECB could also take a role directly monitoring the
The push to change Euribor, launched with the euro in 1999
and which takes estimates from many of the same banks as Libor,
comes as regulators investigate whether banks deliberately
underestimated their borrowing costs to depress or fix the rate.
Euribor, the euro interbank offered rate, and larger
counterpart Libor, are the key gauges of how much banks pay to
borrow from peers and underpin swathes of financial products
from Spanish mortgages to derivatives contracts sealed in
Regulators have not yet shown evidence of manipulation in
Euribor, and the benchmark's organisers - an arm of the European
Banking Federation - say the number of banks involved in
determining the rate would make it difficult to fix.
"The big choice one has to make is whether you want posted
rates or actual rates ... so at the end of the day, banks say
what transaction they had at which price," said one central bank
source. "If you use actual transactions you would have solved
A second source familiar with the matter said: "Everyone
would like to go for this solution. The question is the timing.
And the other question is whether you use a panel (of banks) or
if you can work on it with global data."
The debate about the index's future comes as the European
Commission investigates possible collusion on the Libor and
Euribor benchmark rates. The EU's executive has the power to
impose heavy fines if it finds wrongdoing.
Separately, the European Union's top regulatory official,
Michel Barnier, has launched a review of how such benchmark
rates work. This could result in a new supervisory regime to
keep tabs on them.
One of the main candidates for a supervisory role is the
ECB. The Frankfurt-based ECB and the euro zone's 17 national
central banks have hundreds of money market operations experts
who deal with traders involved in setting Euribor and Libor
The other possible authority, the European Securities and
Markets Authority (ESMA), only has 80 staff at present and lacks
the market expertise of the ECB. Insiders there say that taking
on such a task would require a major recruitment drive.
The ECB declined to comment on whether it could become more
hands-on, but the minutes of one of its regular meetings with
money market experts show the issue of the Euribor and Libor
credibility came up back in March.
At the time, one of its top officials, Paul Mercier, said
benchmarks were best left to the market, but ECB insiders are
aware that with the bank now set to get new oversight powers
from next year, the task of watching Euribor may be thrust upon
"If the conclusion (of the Commission's investigation into
Euribor) is that the market mechanism cannot be trusted, then
the only option is to turn to a public institution," said one
euro zone central banker.
"We are not pushing for that, but the ECB might be a
candidate. It is not easy to find an alternative."
The ECB is already involved in setting one of Europe's key
market rates, Eonia, an overnight lending rate that ECB
monetary policy is designed to steer in order to control
Unlike Euribor and Libor, which are based on banks'
theoretical 'average' borrowing price, Eonia is priced from real
transactions provided by a panel of banks.
The ECB can also make checks if they have concerns with the
rates going through the system.
Replicating this for Euribor could, however, be complicated
by the current reluctance of banks to lend to one another, which
would make it difficult to establish actual rates.
"If you use actual rates, it is unlikely that you would have
liquid markets up to 12 months every day," said one central bank
source. "So it can be very unstable. Liquidity on the unsecured
market has suffered a lot."
Similar concerns were echoed elsewhere. "We would make it
absolutely visible that the European economy is maintained by
activity in the ECB," said one source familiar with the matter.
Guido Ravoet, the chief executive of Euribor-EBF, which
oversees the benchmark, said: "We are fully transparent and
would be happy for Euribor to be subject to direct supervision,
which could be done by either the ECB or ESMA, for instance."
Ravoet defended the benchmark.
"It is not possible to influence the Euribor benchmark with
fewer than 15 banks," he said. "We closely monitor for banks who
are too frequently part of the highest or lowest quotes."
"There is also a great diversity of banks both in
geographical spread and types of activities, and therefore a
diversity of interests."
Euribor rates submitted by banks are compiled by Thomson
Reuters, parent company of Reuters, on behalf of