July 16, 2012 / 3:43 PM / in 5 years

Banks reconsider Libor panels, RBS pulls out

SINGAPORE/HONG KONG (Reuters) - Banks weighed up the reputational risks from an opaque benchmarking system at the center of a global rate-rigging scandal as Royal Bank of Scotland (RBS.L) pulled out of a Singapore panel setting interbank lending rates.

A flag flies over the former headquarters and registered office of the Royal Bank of Scotland (RBS) in Edinburgh, Scotland March 29, 2012. REUTERS/David Moir

People at other banks also said they might seek to get out of the panels, which set daily rates such as the London interbank offered rate (Libor), a benchmark underlying anything from mortgages to complex derivatives.

Partaking in the panels was once deemed a prestigious task, but is now tainted with the suspicion of manipulation, particularly so for smaller, less liquid currencies.

“Any bank that wasn’t thinking about it would be foolish,” said a person at one of the banks contributing to one of the London rate-setting panels.

“People are saying, hang on, what’s the value in this for me? Especially for those currencies which may not be trading in high volumes,” said another. Both people asked not to be named because of the sensitive nature of the issue.

Dozens of such interbank rates are set in financial centers across the world for a range of currencies, and managed by their own organizations, though those in London and Brussels are by far the most influential.

Rates set in Tokyo are known as Tibor, those in Hong Kong as Hibor, and those in Brussels as Euribor.

Reuters exclusively reported on Sunday that Barclays planned to pull out of the rate-setting panel for interbank lending in the United Arab Emirates.

RBS has already exited panels in Tokyo and Hong Kong, the Financial Times reported earlier this month.

An investigation into manipulation of London interbank lending rates started late last year and seized headlines last month when Barclays paid a $453 million fine to settle with U.S. and UK regulators over its role in rate fixing.

More than a dozen other banks are involved in the probe, which has thrown the spotlight on the discredited process for setting the rates that are the basis for hundreds of trillions worth of financial contracts.

HIGHLY DUBIOUS

Bank of America (BAC.N) and RBS on Monday did not appear on a daily page published by Thomson Reuters that lists contributors to Singapore’s U.S. dollar and local currency interbank lending rates, also known as Sibor.

“During the course of this review, we have decided to end our contribution to the rate setting panels for Sibor in Singapore,” said RBS Spokeswoman Patricia Choo.

BofA declined to comment on its contribution to Sibor.

In London, the British Banking Association oversees 10 different Libor rates. The BBA panels for the Swedish krona and Danish krone each have only six members -- Barclays (BARC.L), Deutsche Bank (DBKGn.DE), HSBC (HSBA.L), JPMorgan (JPM.N), Lloyds (LLOY.L) and RBS. The BBA declined comment.

The London rates are obtained by asking the banks at which level they expect they can borrow from other banks. That became a problem when banks stopped lending money to each other in the credit crisis, but continued to provide quotes.

“What has emerged from this in terms of policy suggestions is that any rate which is based on estimates rather than actual financial transactions is highly dubious,” said Justin O‘Brien, director of the center for law, markets and regulation at the University of New South Wales in Sydney.

There are interest rate benchmarks based on lending between banks that work differently, though as yet there is no obvious successor to rates such as Libor, which have found their way into thousands of legal contracts.

Richard Comotto, an academic at the ICMA center at Reading University said there was no need for a new benchmark, as long as the current system was better policed.

“There need to be audits and monitoring. You need to periodically send a team of forensic accountants, and scrutinize quotes on a real-time basis. What was happening was not a secret among the money market community,” he said.

Libor rates submitted by banks are compiled by Thomson Reuters (TRI.TO), parent company of Reuters, on behalf of the British Bankers’ Association.

Additional reporting by Rachel Armstrong in Singapore, Lincoln Feast in Sydney, Steve Slater, Kylie MacLellan and Douwe Miedema in London,; Writing by Michael Flaherty and Douwe Miedema,; Editing by Michael Urquhart and Jon Loades-Carter

Our Standards:The Thomson Reuters Trust Principles.
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