Federal Reserve and Bank of England emails on LIBOR from 2008

A release from the Bank of England sheds light on what the Bank and the Federal Reserve thought about the weaknesses of LIBOR in 2008.

The recommended improvements to LIBOR are straight-forward:

1) Strengthen governance and establish a credible reporting procedure
2) Increase the size and broaden the composition of the USD panel
3) Add a second USD LIBOR fixing for the US market
4) Specify transaction size
5) Only report the LIBOR maturities for which there is a net benefit
6) Eliminate incentive to misreport

In sum: yes, regulators knew that LIBOR wasn’t perfect. Should regulators have been more aggressive then to fix the wrongs? Probably, but the released email exchange was from June 1-3, 2008. What was happening then is now legendary. In the meanwhile, our thanks to the Bank of England for the transparency in what they knew and when they knew it.

The Bank of England’s email transcript plus attachment is here.

A summary of the actions taken by the Bank of England, the Federal Reserve and the British Bankers Association (BBA) comes from the Bank of England’s website:

In response to media reports of correspondence between Timothy Geithner, then President of the Federal Reserve Bank of New York, and Mervyn King, Governor of the Bank of England, in relation to Libor, the Bank of England issued the following statement:

Concerns about difficulties in setting Libor in the stressed market conditions of late 2007 and 2008 were widely expressed, including in the media, although no evidence of deliberate wrongdoing had been cited. In response, the British Bankers Association (BBA), which was responsible for the setting and governance of Libor, launched a review of the process in June 2008.

The Bank was aware of the forthcoming BBA consultation and, despite not having any regulatory responsibilities in this area, was concerned that it be as comprehensive as possible. To that end, the Governor discussed the issue with other central bank Governors at a meeting of central bank Governors in Basel, in May 2008.

Following that, the Bank received the attached email from Mr Geithner on 1 June 2008. The Governor’s office responded and Paul Tucker wrote to the BBA enclosing the Federal Reserve paper on 3 June 2008.

Both the Bank and the Federal Reserve were assured by the BBA that it would take on board the recommendations, either through actions or through questions on which it would consult. The relevant emails are attached.

The BBA’s consultation paper, incorporating the thoughts of, amongst others, the Federal Reserve, was published on 10 June 2008.

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