Fixing LIBOR: some preliminary findings - Treasury Contents

3  Manipulation during the financial crisis


40. In 2007, significant strains began to appear within the inter-bank funding markets. Table 1, adapted from the March 2009 Turner Review, highlights the key issues faced by banks during this period.Table 1: Stages of the Crisis: 2006-2009
2006 - Summer 2007

Localised credit concerns

Rising defaults in US subprime loans.

Expectations of property prices fall.

Summer - Autumn 2007

Initial crack in confidence and collapse of liquidity

Failure of 2 large hedge funds. Spreads in inter-bank funding and other credit products rise sharply. Inter-bank funding for second tier banks dries up. Northern Rock faces retail run.
Autumn 2007

- early Summer 2008

Accumulation of losses and

continuation of liquidity strains

Severe mark-to-market losses in trading books. Collapse of commercial paper markets.

Funding strains in the secured financing market.

Worries about liquidity of major institutions. Government-assisted rescue of Bear Stearns.

Summer 2008

Intensification of losses and

liquidity strains

Mark-to-market losses and liquidity strains continue to escalate.

Housing market problems recognised as widespread in UK, US and other countries, as house prices fall and supply of credit dries up.

Funding problems of UK mortgage banks intensify.

September 2008

Massive loss of confidence

Bankruptcy of Lehmans breaks confidence that major institutions are too big to fail. Credit downgrade of AIG triggers rising collateral calls, requiring government rescue.

Mix of credit problems, wholesale deposit runs and incipient retail deposit runs lead to collapse of Washington Mutual, Bradford & Bingley, and Icelandic banks.

Almost total seizure of interbank money markets; major banks significantly reliant on central bank support.

October 2008

Government recapitalisation,

funding guarantees and central bank support

Exceptional government measures to prevent collapse of major

banks; explicit commitments that systemically important

banks will not be allowed to fail.

November 2008 ?

Feedback loops between banking system and economy.

Further government measures to offset feedback loop risk.

Impaired bank ability to extend credit to real economy produces major globally synchronised economic downturn.

Recession threatens further credit losses which might further

impair bank capital.

Asset Protection Scheme.

Source: Adapted from Financial Services Authority, The Turner Review, March 2009, Box 1B, p27

41. In the face of these pressures in the inter-bank lending markets, Mr Tucker, emphasised the importance of LIBOR to the authorities. He explained that:

    [...] what is important from quite early in the crisis, from the summer of 2007 onwards, is that LIBOR became increasingly used as a summary statistic of what was going on in the market. I think there are two reasons. First of all, LIBOR diverged from the safe rate of interest in a material way for the first time in living memory. Secondly, we became aware as the weeks and months passed that less money market activity was going via the brokers, more was being done bilaterally. Those are circumstances where everybody has less information about what is going on, and in those circumstances you place greater weight on the indicator that is available every day, which was LIBOR. I think everybody rather slipped into the habit of using LIBOR as a kind of portmanteau term for money market conditions, bank funding conditions, actual submissions, the actual LIBOR fix, and actually I think that is going on today.[67]

42. The individual LIBOR submissions of the banks, rather than the aggregated headline LIBOR figure, were also becoming important markers of the health of individual banks. On 3 September 2007, Bloomberg published an article entitled "Barclays Takes a Money Market Beating".[68] This article highlighted Barclays' high LIBOR fixing relative to other banks in the LIBOR panel, and posed the question "So what the hell is happening at Barclays and its Barclays Capital securities unit that is prompting its peers to charge it premium interest rates in the money market?".[69]

43. This article would mark the start of a second phase of LIBOR manipulation by Barclays. In this phase, Barclays attempted to manipulate its LIBOR submissions to prevent it being singled out when compared to other banks in the LIBOR panel. The FSA's Final Notice stated that "Senior management's concerns in turn resulted in instructions being given by less senior managers to Barclays' Submitters to reduce LIBOR submissions in order to avoid further negative media comment".[70] Mr Diamond confirmed that these senior management were from Barclays' Group Treasury.[71] The FSA's Final Notice said that:

    Concerns about the media perception of high LIBOR submissions continued at intervals for the remainder of 2007 and throughout 2008. At times of particular market stress this resulted in instructions being given to Barclays' LIBOR Submitters to reduce Barclays' submissions such that they did not stand out too far from the submissions of other contributing banks. This was expressed by Manager D (in Barclays' Group Treasury) as an instruction that Barclays should not "stick its head above the parapet" in terms of its LIBOR submissions.[72]

It should be noted Barclays is not alone. FSA investigations continue against seven other banks, including some non-British banks.[73]

Media and academic concern about LIBOR setting

44. Barclays' continuing manipulation of its own LIBOR setting took place against a background of media concern about the LIBOR setting process during the crisis. On 25 September 2007, an article by Gillian Tett in the Financial Times entitled "Libor's value called into question" noted the complaint of the Treasurer of one of the largest City banks that "The Libor rates are a bit of a fiction. The number on the screen doesn't always match what we see now".[74]

45. On 16 April 2008, the Wall Street Journal published an article called "Bankers cast doubt on Key Rate amid crisis" by Carrick Mollenkamp. This noted that:

    The concern: Some banks don't want to report the high rates they're paying for short-term loans because they don't want to tip off the market that they're desperate for cash. The Libor system depends on banks to tell the truth about their borrowing rates.[75]

However, the article also noted that there was no specific evidence to suggest false submissions were occurring.[76] On 29 May 2008, another Wall Street Journal article, "Study casts doubt on key rate", compared LIBOR submissions with the market for credit default swaps.[77] It provided the following analysis:

    In order to assess the borrowing rates reported by the 16 banks, the Journal crunched numbers from another market that provides a window into the financial health of banks: the default-insurance market. Until recently, the cost of insuring against banks defaulting on their debts moved largely in tandem with Libor—both rose when the market thought banks were in trouble.

    But beginning in late January [2008], as fears grew about possible bank failures, the two measures began to diverge, with reported Libor rates failing to reflect rising default-insurance costs, the Journal analysis shows. The gap between the two measures was wider for Citigroup, Germany's WestLB, the United Kingdom's HBOS, J.P. Morgan Chase & Co. and Switzerland's UBS than for the other 11 banks. One possible explanation for the gap is that banks understated their borrowing rates.[78]

The article noted though that "The Journal's analysis doesn't prove that banks are lying or manipulating Libor".[79] On the same day, Bloomberg published an article, "Libor Banks Misstated Rates, Bond at Barclays Says", which started as follows:

    Banks routinely misstated borrowing costs to the British Bankers' Association to avoid the perception they faced difficulty raising funds as credit markets seized up, said Tim Bond, a strategist at Barclays Capital.

    "The rates the banks were posting to the BBA became a little bit divorced from reality," Bond, head of asset-allocation research in London, said in a Bloomberg Television interview. "We had one week in September where our treasurer, who takes his responsibilities pretty seriously, said: 'right, I've had enough of this, I'm going to quote the right rates.' All we got for our pains was a series of media articles saying that we were having difficulty financing."[80]

46. It was not only in the media where discussion of the potential for manipulation of LIBOR was occurring, as academics and international authorities also explored the weakness in the LIBOR setting process. A paper by Jacob Gyntelberg and Philip Wooldridge at the Bank for International Settlements (BIS) in the March 2008 BIS Quarterly Review noted that banks had a reason to misquote during funding crises:

    However, transparency raises questions about the information signalled by contributing banks through their quotes. There may be circumstances in which contributing banks deliberately choose to disclose biased quotes. If there is uncertainty about the liquidity position of a contributing bank, the bank will be wary of revealing any information that might add to this uncertainty for fear of increasing its borrowing costs.[81]

However, the BIS paper played down the possibility that there was fixing of the LIBOR submissions at work:

    In the US dollar market, the widening of Sibor and H.15 spreads over Libor is consistent with signalling by Libor contributor banks. However, many of the banks on the US dollar Libor panel are also on the euro Libor panel, and there are no signs that signalling distorted the latter fixing.[82]

Meanwhile, a working paper entitled "LIBOR Manipulation?" from August 2008, and referencing the Wall Street Journal articles, noted that:

    While statistical methods alone do not prove that manipulation has occurred in a particular market, some questionable patterns do exist with respect to the banks' daily Libor quotes. Our analyses of these apparent anomalies within the individual quotes suggest that the evidence is inconsistent with an effective manipulation of Libor. Nevertheless, the analyses presented in this study demonstrate that distinct non-random patterns of reported borrowing costs did exist during distinct periods of time, patterns that go beyond the findings that were originally reported by the Journal. In particular, for the period ending on August 8, 2009, the intraday variance of individual quotes is not statistically different from zero, and the banks deciding group for the Libor includes almost the entirety of the sixteen banks for a period of over seven months.[83]

In other words, the statistics did not show that manipulation of LIBOR was successful. But they did show that in several episodes LIBOR submissions were not behaving as they had when the market was functioning—they were very steady from day to day, and the quotes from different banks were very close together. This could readily be interpreted as the consequence of an attempt to make up a number that had to be available but could not be observed.

The role of the authorities


47. Given the existence of the concerns over the LIBOR setting process, both in the media and academe, we asked why the regulators had not spotted the manipulation of submissions by Barclays earlier. The Governor of the Bank of England made the following observations:

    I did not say that fraud was restricted just to the rogue traders. It was also true that there was deliberate misrepresentation by Barclays in the submissions. On that, we had no evidence of wrongdoing. None was supplied to us. The evidence you cite—there were plenty of academic articles that looked in it and said that they could not see in the data any evidence of manipulation. I say again, if you go back to the inquiries that the regulators made, it took them three years to work out and find the evidence of wrongdoing. If it was so obvious and all in the newspapers and everyone was talking about it, one might ask why everybody did not say, "This is wrong." The reason was that it wasn't wrongdoing. It was a market that was dysfunctional and was not operating in any effective way.[84]

Paul Tucker noted that:

    We didn't see it. I think there were other studies, including one by the BIS, although I think I am aware of this after the fact, that didn't conclude that it was a problem. Maybe we were just too focused on the financial crisis.[85]


48. On 15 November 2007, the Bank of England hosted a meeting of the Sterling Money Markets Liaison Group. Present at the meeting were Paul Tucker as Chairman, several other representatives of the Bank of England, Douglas Hull from the FSA, as well as various representatives of banks, including Simon Chatterton as an alternate for Barclays. The minutes of that meeting record that:

    Several group members thought that Libor fixings had been lower than actual traded interbank rates through the period of stress. Libor indices needed to be of the highest quality given their important role as a benchmark for corporate lending and hedging, and as a reference rate for derivatives contracts.

    John Ewan (BBA) outlined the quality control and safeguard measures used by the BBA to ensure the quality of Libor. Dispersion between panel banks' submissions had increased during August but had since fallen back, in part reflecting clarification from the BBA on Libor definitions.[86]

49. In his evidence to us, Mr Tucker claimed that he had not taken the concerns expressed at the November 2007 Sterling Money Markets Liaison Group meeting as signs of dishonesty, but rather as a signal of dysfunction in the market. He explained that:

    [...] less [inter-bank lending] was going through the brokers, more was being done bilaterally, people did not know anything very much about each other's transactions at all, and so I heard this as, "They don't know what each other are doing." It was questioning the judgments that the different parties were making, or that they were relying on bilateral private transactions—I did not read this as cheating. And when John Ewan responded there was not then a great outcry in the room. People did not get in touch afterwards and say, "You've missed the point here."[87]

In Mr Tucker's supplementary evidence to the Committee, he provided more explanation as to why he did not believe the discussions noted in the minutes from the 15 November 2007 meeting indicated dishonesty:

    The BBA's rules do not require LIBOR submissions to be based on actual transactions, but require panel banks to answer the following question:

    "At what rate could you borrow funds, were you to do so by asking for and then accepting interbank offers in a reasonable market size just prior to 11am."

    The BBA provisions go on: "Therefore, submissions are based upon the lowest perceived rate at which it could go into the London interbank market and obtain funding in reasonable market size, for a given maturity and currency. BBA LIBOR is not necessarily based on actual transactions ...".

    Bearing in mind the definition of LIBOR and the illiquid, volatile and sometimes dysfunctional conditions generally prevailing in the money markets after August 2007, there might legitimately be a difference between actual transactions in the market and an individual bank's LIBOR submission because:

    (i) There was uncertainty as to what constituted "reasonable size" and increased scope for different panel banks legitimately to make different judgements on this point;

    (ii) Given the sporadic nature of market liquidity in this period, there might be a significant difference between the rate at which a bank could borrow at reasonable size at 11.00 am. and the rate at which it could borrow at other times of the day, or its average borrowing costs over the course of the day;

    (iii) Banks entered into fewer, more sporadic and on average smaller interbank transactions, particularly at longer maturities. They therefore had to rely more on judgement in formulating their LIBOR submissions than pre-crisis, and market conditions made the exercise of that judgement increasingly difficult;

    (iv) There was less transparency of the interbank market, in all likelihood because of reduced activity at longer maturities and more bilateral as opposed to brokered transactions.[88]

The Governor of the Bank of England also emphasised that:

    If you go back to the money markets liaison group meeting, the regulator and the BBA were present at the meeting. The minutes were published on the website. No journalist interpreted those remarks as, "Gosh, we have a smoking gun of wrongdoing." The regulator did not look at it and say, "This is wrongdoing." There was enormous concern at the time about what the submissions of LIBOR actually meant in circumstances when the market was dysfunctional, and indeed I discussed it with this very Committee.[89]

Following our hearing, Lord Turner wrote to the Chairman of the Treasury Committee, and noted the preliminary findings of the FSA that:

    In relation to any information which flowed to us from the Bank of England, we are aware that a member of our staff attended the Bank's Sterling Money Markets Liaison Group on November 15th 2007. We are investigating whether there was any report of that meeting circulated within the FSA which might have raised concerns, but we are not currently aware that that is the case.[90]


50. On 13 July 2012, the Federal Reserve Bank of New York released copies of transcripts of calls its analysts had had with Barclays staff, as part of a release to Congress.[91] One of those transcripts, of a call between a Barclays staff member, and Fabiola Ravazzolo (FR), an analyst in the markets group of the Federal Reserve Bank of New York on 11 April 2008 contained a seeming admission of dishonesty at Barclays:

    [Unknown Barclays staff member]: We were putting in where we really thought we would be able to borrow cash in the interbank market and it was

    FR: Mm hmm.

    [Unknown Barclays staff member]: Above where everyone else was publishing rates.

    FR: Mm hmm.

    [Unknown Barclays staff member]: And the next thing we knew, there was um, an article in the Financial Times, charting our LIBOR contributions and comparing it with other banks and inferring that this meant that we had a problem raising cash in the interbank market.

    FR: Yeah.

    [Unknown Barclays staff member]: And um, our share price went down.

    FR: Yes.

    [Unknown Barclays staff member]: So it's never supposed to be the prerogative of a, a money market dealer to affect their company share value.

    FR: Okay.

    [Unknown Barclays staff member]: And so we just fit in with the rest of the crowd, if you like.

    FR: Okay.

    [Unknown Barclays staff member]: So, we know that we're not posting um, an honest LIBOR.

    FR: Okay.

    [Unknown Barclays staff member]: And yet and yet we are doing it, because, um, if we didn't do it

    FR: Mm hmm.

    [Unknown Barclays staff member]: It draws, um, unwanted attention on ourselves.[92]

The release by the Federal Reserve Bank of New York recorded that "Immediately following this call [noted above], the analyst notified senior management in the Markets Group that a contact at Barclays had stated that underreporting of LIBOR was prevalent in the market, and had occurred at Barclays".[93] Between the 4-5 May 2008, the Governor of the Bank of England and Timothy Geithner, at the time President of the Federal Reserve Bank of New York, had a conversation at Basel about the operation of LIBOR.[94] Following discussions with the BBA, on 1 June 2008 Timothy Geithner sent an email to the Governor of the Bank of England.[95] The email contained a memorandum entitled "Recommendations for Enhancing the Credibility of LIBOR".[96] The memorandum contained the following recommendations:

    1. Strengthen governance and establish a credible reporting procedure

    To improve the integrity and transparency of the rate-setting process, we recommend the BBA work with LIBOR panel banks to establish and publish best practices for calculating and reporting rates, including procedures designed to prevent accidental or deliberate misreporting. The BBA could require that a reporting bank's internal and external auditors confirm adherence to these best practices and attest to the accuracy of banks' LIBOR rates.

    To further enhance perceptions of the BBA as an objective intermediary in the rate-setting process, we recommend greater transparency with respect to the financial relationships between the BBA and the panel banks, and around the BBA's financial interests in LIBOR.


    6. Eliminate incentive to misreport

    If the combination of best practices and audit recommendations in (1) above seems unlikely to be sufficiently effective in ensuring accurate reporting, a complimentary approach might be to adopt the following process for collecting, calculating, and publishing LIBOR rates. The BBA could collect quotes from all members of the expanded panel, and then randomly select a subset of 16 banks from which the trimmed mean would be calculated. The names and quotes for the 8 banks whose rates are averaged to calculate the LIBOR fixing would be published. The banks whose reports fall above or below the midrange would not be publicly identified, nor would the level of their outlying rates. This random sampling from an expanded panel would lessen the likelihood that the market would draw a negative inference regarding a particular bank's continued absence from the list of published quotes.[97]

The Governor was keen to emphasise that:

    I solicited it [the note described above], which is the first part. I spoke to Tim Geithner in Basel a few weeks before. After that, I think it was on 19 May, his deputy, Bill Dudley, telephoned Paul Tucker and said that Tim Geithner wanted some advice on feeding views to the BBA, who are responsible for LIBOR. Should he write to the BBA, copied to me? Or should he write to me, copied to the BBA? Whatever.

    I sent a message back through Paul saying, "Write to me. We will look at your letter, and if we agree with it, we will endorse it and send it on to the BBA." So we solicited that e-mail, which arrived late one evening when I was in Frankfurt. I sent a message back saying that staff should give a view on it. I got that the next evening when I was back from Frankfurt, and the next day we wrote to the BBA, forwarding the e-mail memo from the New York Fed, saying that we wanted them to take account of this in their forthcoming consultation.[98]

51. We discussed this memorandum, and the Bank of England's response, with both the Governor of the Bank of England and Paul Tucker. We also requested further information on any Bank of England staff briefing about this note. The Governor of the Bank of England strongly denied that the Bank had received evidence of wrong-doing from the Federal Reserve Bank of New York via the memorandum. He noted that:

    [...] we have been through all our records. There is no evidence of wrongdoing or reporting of wrongdoing to the Bank. The memo from Mr Geithner that you referred to was, if you like, a constitution for how LIBOR should operate. It already had a set of operations. This was a self-reporting scheme. Any self-reporting scheme has to have a provision about deliberate misreporting. That is not the same as saying that they believe that there was deliberate misreporting.[99]

52. Since Mr Tucker had had conversations with the New York Federal Reserve, we questioned him about whether these contacts, and the paper from the Federal Reserve Bank of New York, had elicited any evidence of wrong-doing. He strongly denied that it had:

    Michael Fallon: Mr Tucker, last week when we asked you specifically about LIBOR integrity, you said, "We thought the underlying markets were dysfunctional, sporadically illiquid, much less reliable than normal, but we did not have suspicions of dishonesty". Yet the paper from the New York Fed recommends work with LIBOR banks to establish procedures designed to prevent deliberate misreporting. There is a whole section in this note on the need to "eliminate incentives to misreport". They were clearly concerned about misreporting. Did you really not have any suspicion of dishonesty?

    Paul Tucker: In my discussions with Bill Dudley of the New York Fed, it was not framed in that way; it was framed as eroding confidence and credibility, particularly in dollar LIBOR, which was being set lower during London hours than it was subsequently trading in New York. We were very concerned about this piece of global infrastructure losing credibility. As the Governor said, we urged the BBA to review everything, particularly its governance, and to do so on a global basis. No, the note did not set off dishonesty alarm bells.

    Michael Fallon: The penny didn't drop that the phrase "deliberate misreporting" might imply some degree of dishonesty?

    Paul Tucker: No, it didn't.

    Michael Fallon: Why not? What did you think "deliberate misreporting" was?

    Paul Tucker: I am not sure I addressed my mind to it.

    Michael Fallon: You didn't address your mind to the note from the New York Fed that we are discussing?

    Paul Tucker: We were very focused on ensuring that there was a completely open-ended review of the way that LIBOR was run and constructed, and of some technical issues, as well. We were less interested in the technical issues than in the overall governance of the process. I think that we acted pretty firmly to ensure that that review occurred. The annual review that the BBA published was on which banks would be on the LIBOR panel, and we had made it clear to the BBA that that regular review of the LIBOR panel would not be enough.

    Michael Fallon: This is not about credibility. Is "deliberate misreporting" dishonest?

    Paul Tucker: Well, it turns out with hindsight that, yes, it was, but it did not set alarm bells ringing at the time, I am afraid.

    Michael Fallon: But how could "deliberate misreporting" be honest?

    Paul Tucker: I understand the question, Mr Fallon, but all I can say is that it did not set alarm bells ringing. We were very concerned about the credibility of LIBOR as a piece of global infrastructure and we acted.

    Michael Fallon: But you must have realised at the time that there were considerable incentives for banks to underreport and to protect their positions, given what was happening to Barclays.

    Paul Tucker: As I said last week, LIBOR seemed to move in a broadly sensible direction, given the strains in the market. The period that we are discussing now is one where sterling LIBOR and the LIBOR spread were rising. There were rumours about HBOS and about it approaching us for funds. We were very much focused on sterling LIBOR because we are the sterling lender of last resort. There was then this emerging concern in particular about dollar LIBOR. We were very concerned about the loss of credibility, but we did not seize on it in terms of dishonesty.[100]

The release of further information from the Bank of England following our oral evidence hearings contained a Bank of England staff note sent to Mr Tucker on 22 May 2008. That note contained the following passages:

    Fixing process, perception problem

    5 The Libor problem has two fundamental sources: the nature of the fixing process (a survey not a traded rate), and its transformation from a measure of London money market conditions to the basis of a global derivatives market.

    6 There is a long standing perception that Libor by virtue of the manner in which it is set is open to distortion: panel banks have no obligation to trade or to have traded at the rates that they submit, so it is at least plausible that these are influenced by commercial incentives. In normal times these might only have had a marginal effect, and could bias Libor different ways at different times. But this perception does mean that confidence in Libor is fragile. And in the extreme conditions of the last eight months banks have been subject to the more powerful incentive of avoiding stigma from being seen to submit high rates reflective of what they are actually paying.

    7 If stigma does influence submitted rates, it would tend to bias Libor downwards and/or narrow the dispersion of individual, submissions. But it is not clear why the effect would be bigger in dollars, so this does not seem to be a good explanation for the alleged downward bias in $ Libor.

The release to this Committee by the Bank of England included an email chain between the (unknown) author of the note above, and Mr Tucker. Following further questions from Mr Tucker, the author made the following comments:

    We're saying that the fact there is a fuss is a problem, because of (a) the effect on confidence and (b) feedback from the fuss into real volatility in the fixing (after the April 16 BBA warning). But it is poor governance that allows there to be a fuss, hence governance needs fixing. We also say that the difference between Libor and other empirical measures (H15, swaps) is _not_ itself evidence that Libor is distorted. (The Fed will know this - our argument is just a small extension of that in the JPM piece.) So the empirical evidence does not as yet justify reforming the _definition_ of Libor.[101]

Lord Turner, in a letter to the Chairman of the Treasury Committee in July 2012, made the following comments about contacts between the FSA and the Federal Reserve Bank of New York:

    In addition it might be helpful to outline our current state of knowledge in relation to any information that passed from the Federal Reserve to the FSA. In his testimony to Congress on 17 July 2012, when referring to a conversation between a Barclays employee and a Federal Reserve employee on 11 April 2008, Chairman Bernanke stated: 'The Fed, after receiving this information...informed all the relevant authorities in the UK and the US. The NY Fed also communicated with the FSA and the Bank of England in the UK.'

    We have since been in touch with the Federal Reserve to clarify whether they did indeed send this information to us. They have now confirmed that they do not have any evidence to suggest that the communication took place. Nor do we currently have any evidence of such communication in FSA records.

    We have also asked the Federal Reserve to let us know whether they have any evidence to suggest that the email from Tim Geithner to Mervyn King on 1st June 2008 was copied to the FSA. They have confirmed that they have no indication that it was.

    It remains of course possible that our Internal Audit Review will subsequently find examples of communications between the Federal Reserve and the FSA of which both we and the Federal Reserve are currently unaware.[102]


53. Much of the contact between the Federal Reserve Bank of New York and the Bank of England centred on the memorandum described above, and then the British Bankers Association (BBA) review of LIBOR setting. This review provided an opportunity for the BBA, and the authorities, to reform the LIBOR setting process. The information received by the Treasury Committee after our oral evidence hearings with the Bank of England provides an insight into how the authorities acted on their concerns over LIBOR setting. The British Bankers Association has also provided the Committee with additional information. The Bank of England's correspondence contains the following short timeline of its efforts, alongside those of the Federal Reserve Bank of New York (FRBNY):

    ·  From May 2008, the Bank of England encourages the BBA to conduct a global review of Libor and banks to engage with the review at a sufficiently senior level. It also begins to discuss these issues with the FRBNY.

    ·  The Bank considers the points in the Geithner memorandum and ensures that those points are taken on by the BBA.

    ·  The Bank and the Federal Reserve work closely together behind the scenes to influence the consultation paper issued by the BBA on 10 June 2008.

    ·  The Bank also continues to work on influencing the outcomes after the consultation paper is published until the BBA publishes its final report on 18 December 2008.[103

54. The additional evidence from the Bank of England provided a picture of an institution that took a keen interest in what the BBA review might achieve. An early BBA announcement on 30 May 2008 was met by the following comment from the Governor to Bank staff: "This seems wholly inadequate. What should we do?"[104] After the Bank had passed on Mr Geithner's memorandum to the BBA, the Bank engaged with the BBA on various drafts of the BBA consultation documents.

55. As the consultation continued, another concern developed at the authorities. They were keen to ensure that they did not appear to endorse the BBA's proposals and appeared to wish to maintain their distance. For example, on 5 June 2008, an email from Michael Cross at the Bank of England to Alex Merriman at the BBA contained the following comment:

    On the Bank's name, we have a clear line that it should not be used. I understand that the FSA and the Federal Reserve have the same position. Neither can we accept "relevant central banks...etc". That will obviously be taken as implying our endorsement of the proposals you make. Hence our suggestion that you refer to "all interested parties", as we and I am sure the far wider community with an interest in Libor would of course be happy to discuss your ideas on the basis of this paper.[105]

A paper on LIBOR by Michael Cross on 26 June 2008 noted that:

    We do not think that central banks should be formally involved in the LIBOR panels and processes, but we do think we should maintain a watching brief. We know the Federal Reserve and the Swiss National Bank wish, like us, to engage with the BBA on its review.[106]

The documents show that the Governor of the Bank of England responded on 2 July 2008 that he was "broadly content with the approach" described in the 26 June 2008 note above.[107] He also said though that he "would like Mr Tucker to meet with Angela Knight to impress on her the need for greater energy in [the] BBA's response and to make clear that [the Bank] would not stand in the way of alternative market initiatives to provide alternatives to LIBOR".[108] A letter from the Bank to the Treasury Committee, sent on 23 July 2012, summarised the position as follows:

    With regard to the Bank's involvement in the work undertaken by the BBA in 2008 on the scrutiny and governance of the Libor fixing process, the Bank's preferred approach was (and is) for there to be a gradual move away from systems based on self-reporting. And the Bank, having no regulatory authority, was not prepared to lend its imprimatur to a system that it was not able to control or enforce. As can be seen from this note and the papers disclosed on Friday, the BBA did want to use the Bank's name to bolster confidence in Libor.[109]

When asked whether he thought that the BBA had done a "good job", the Governor of the Bank of England told us that "I think they had to be nudged to get into the right direction, but, once they had been nudged in May 2008, they did work very hard to make a success of the consultation."[110]

56. In a letter to the Chairman of the Treasury Committee following our evidence hearings, Lord Turner outlined the FSA staff's knowledge at the time of the BBA review:

    We have identified, however, that some of our Markets Division staff most directly involved in inputting to the BBA LIBOR Review during May/June 2008 were sufficiently aware of market concerns of possible divergence between some LIBOR submissions and the actual cost of available funding that they identified this as a crucial issue which needed to be addressed by the Review. There is for instance, in the documents released last week by the Bank of England, an email from one of our staff to the BBA noting that the BBA should examine the 'Scrutiny of Submissions' since 'the rates submitted must represent the levels the panellists actually can fund.' This point was also made by the relevant staff in a memo to the FSA's then Managing Director, Wholesale, which described the key points we were inputting to the LIBOR review.[111]

57. It should be noted that on 25 April 2008, Angela Knight is quoted as telling a meeting of senior UK bankers, as well as representatives of the Bank of England (including the Deputy Governor at the time, Sir John Gieve) that "Longer term, [she] thought it would be necessary to explore whether a trade association was best placed to continue to provide what represented a key piece of market infrastructure."[112]


58. We have seen already that the New York Federal Reserve Bank received direct confirmation from a Barclays source that manipulation of its submissions was occurring. Barclays' discussions with UK regulators appear to have been less clear. The FSA's final notice concluded that:

    Barclays did raise concerns externally about the LIBOR submissions of other banks (which Barclays perceived to be understated) and on occasion referred to its own approach to submitting LIBOR. However, these comments did not fully explain Barclays' approach and were inconsistent.[113]

Barclays provided this Committee with a timeline of contacts with the FSA, the BBA, the Bank of England and the US Federal Reserve.[114] Lord Turner defended the FSA's response to these contacts as follows:

    Well, as I said earlier, Barclays had very usefully identified the 13 instances between September '07 and October 2008, where they feel that in some way they contacted the regulator—the FSA. The three of those which in the judgment of enforcement and, so far, in my judgment, looking at the file, were the clearest or closest to being clearest in suggesting that something was going on are described in the [FSA's] final notice. They are described in paragraphs 128 to 130, 131 and 172 to 174.

    What two of those illustrate is that Barclays were actually sort of saying some elliptic things that implied that some other people might not be playing the game, but behind that they themselves were saying, "We'd better not tell the FSA about it", and that is set out in the final notice.

    However, when I looked at one of them—paragraph 131—somebody said, "We're being clean in principle, but we're not being clean clean." The question is why didn't somebody put up a red flag? Well, the answer is this occurs as a comment among lots of comments in a large conversation about liquidity conditions in the marketplace. It occurs at a relatively junior level, and at that level somebody does not say, "This is a red flag that I should put up the management chain."

    So within the FSA at that time, I can find no evidence that there were concerns noted at a senior management level or, for instance, discussed at the ExCo level. Now, in a perfect world, yes, those would have been spotted. But I return to the fact that there was simply a mindset that if there were problems here, it was for the BBA to solve them. Now, maybe that is a part of the way the world then was—the assumptions people then had—but that was the assumption that people were making at that time.[115]

Lord Turner has informed us that the Internal Audit Department of the FSA is now undertaking a review of how the FSA dealt with the contacts about LIBOR.[116] We discuss the Bank of England's contact with Barclays over LIBOR, and particularly the conversation between Mr Diamond and Mr Tucker, in the next section of this Report.


59. We have seen that the crisis in 2007 led to a close examination of the LIBOR submissions by the media, markets, and regulators. We questioned Barclays as to why, given both Barclays' submissions to the authorities that LIBOR submissions were being manipulated, its own board did not question Barclays' LIBOR submissions:

    Mr Love: [...] Mr Diamond, in his evidence to us, told us that he was continuously trying to alert others in important positions to the fact that other banks were manipulating LIBOR and that was the occasion for weakness on behalf of Barclays. Did it never occur to people at Barclays, particularly the board of directors, that if that were true—that banks were manipulating LIBOR—that would apply just as much, perhaps even more, to Barclays because it was an outlier in this regard? Did that never occur to the board? Were you being naïve in not thinking that that might be the case?

    Marcus Agius: The concern that we had was not so much about the actions of LIBOR as such, because that was indicative of the underlying situation. The concern we had was that, because our submissions were high, people might falsely or incorrectly conclude that we were having more trouble funding than we actually were. And again, to put this into context, anybody who was not on the bridge of a bank during the financial crisis—and many others besides—who says it was not terrifying was not there. These were very difficult times and we were very nervous that we may be misinterpreted by the market as to our financial strength. We monitored it—and I know I did not, because it is not my job—and I know from many conversations I had with John Varley, with Chris Lucas and other people inside the bank that we were watching the funding markets like a hawk, as we should have done.

    Mr Love: Let me just take those facts you have just said: you were watching the markets like a hawk, and you were terribly concerned about the level of turbulence—and we do understand that, as it was a significant part of the evidence that we received yesterday. Did it not occur to anyone that one of the ways in which you could ease the situation for Barclays in that particular context was by manipulating LIBOR submissions on—

    Marcus Agius: That was not a consideration.

    Mr Love: I am not suggesting for a moment that you thought this was true, but you may well have had a conversation that went, "This could be possible. Can we make sure that we are submitting accurate results to LIBOR and the BBA?"

    Marcus Agius: As I said, our greater concern was what was actually happening rather than the technicalities of LIBOR submissions.[117]

Conclusions on LIBOR submissions during the financial crisis

60. Barclays has suggested that there were numerous contacts between itself and the authorities over LIBOR during this period. The clearest message appears to have been given by Barclays to the Federal Reserve Bank of New York, rather than to the UK authorities. Lord Turner described some of Barclays' contact with the FSA as "elliptic". We have found little evidence that Barclays provided the UK authorities with a clear signal about dishonesty at other firms, or its own. We await the outcome of the other regulatory investigations to see whether other firms provided such a signal, were equally elliptical or even silent on this problem. The timeline of contacts between Barclays and regulators provided to the committee by Barclays is not, of itself, evidence of a proactive approach on trying to report irregularities in the setting of LIBOR rates.

61. We would have expected the FSA and the Bank of England to have made efforts to identify and provide to the Committee documents clearly and directly relevant to our inquiry, subject to statutory restraints.

62. The financial crisis, and the serious dysfunctionality of the interbank lending markets, meant that it was difficult during this period for firms to estimate their own funding costs. LIBOR submissions were being used by markets and regulators to assess the financial health of the institutions involved. The FSA and the Bank of England were engaged in crisis management, alert to the possibility of further bank failures, rather than LIBOR manipulation. This is understandable, given the circumstances of the financial crisis, but with the advantage of hindsight constitutes a failing by the authorities.

63. Given the importance of LIBOR submissions in assessing banks' health, Bank of England staff were aware of the danger that banks might improperly manipulate their submissions. They noted that "banks have been subject to the more powerful incentive of avoiding stigma from being seen to submit high rates reflective of what they are actually paying". However, they primarily saw this as a matter for the regulator rather than the Bank of England. Mr Tucker told us that possible clues to dishonesty "did not set alarm bells ringing at the time". The evidence suggests that the Bank of England was aware of the incentive for banks to behave dishonestly, yet did not think that dishonesty was occurring. Nor did it appear to have asked the FSA to check to see if such dishonesty was occurring. With hindsight this suggests a naivety on the part of the Bank of England. They were certainly relatively inactive. This confirms evidence from other Treasury Committee inquiries of the dysfunctional relationship between the Bank of England and the FSA which existed at that time to the detriment of the public interest.

64. Unlike the Bank of England, the Financial Services Authority was the prudential regulator. Its shortcomings at this time are therefore far more serious. The Committee is concerned about the FSA's failure to appreciate the significance of market rumours relating to the artificial rigging of the LIBOR rate. We therefore look forward to the result of the FSA's internal investigation, the existence of which was disclosed in evidence to us. The Committee will want the findings of that investigation to be published.

65. As we have noted, the US authorities had received direct notification from Barclays that their LIBOR submissions were dishonest. In response to this, evidence given to a parallel inquiry in the US congress by Timothy Geithner revealed a 2008 memorandum provided to the Bank of England by the Federal Reserve Bank of New York on LIBOR setting. We know that the Bank of England then forwarded that memorandum to the British Bankers Association by the Bank of England. The evidence we have received from the UK authorities claims that they received no direct information about the evidence the US authorities had received about Barclays' dishonesty. The evidence we have received is that there was significant co-operation between the US and the UK authorities at the time of the 2008 BBA review. It is understandable that regulators, in response to the LIBOR crisis, may have placed information in the public domain to demonstrate their respective assiduity at the time. This release of information must complement co-operation between regulators. The Chancellor should stress to his counterparts the need for such co-operation at the next G20 meeting.

66. The BBA's review of LIBOR in 2008, given that it focussed on the concerns of the market over the LIBOR setting process, appears to have been an opportunity missed to stop the attempted manipulation that was occurring. The Wheatley review should now look at the role of the BBA in LIBOR setting at that time in detail and publish its findings. This is essential if its recommendations for a more reliable LIBOR setting process are to carry credibility. The review should include how such systems work during times of financial crisis, when there may be little or no interbank lending taking place, and how the authorities should respond to signs of dysfunction. It should also consider whether a trade association is the appropriate body to perform that role.

  1. We have seen no explanation for the failure, both of Barclays' board and of senior executives, to question its own firm's LIBOR submissions, when its staff were complaining about the submissions of other firms, and media and academic reports questioned the incentives present in LIBOR setting. There appears to have been enough doubt being spread about the LIBOR setting process to suggest that a closer examination by Barclays board of its own practices should have taken place. It stretches credibility to suggest that Barclays was trying to alert regulators to inconsistencies in the LIBOR submissions of other banks yet had no idea about the repeated 'low-balling' of its own submissions during the financial crisis set out in the FSA Final Notice. We have found no evidence that the board of Barclays sought to conduct an investigation. This was one of a number of failings on the part of Barclays' board. Others can be found in Sections 5 and 6.

67   Q 354 Back

68   Bloomberg, Barclays Takes a Money-Market Beating: Mark Gilbert (Update1), 3 September 2007 Back

69   Bloomberg, Barclays Takes a Money-Market Beating: Mark Gilbert (Update1), 3 September 2007 Back

70   Financial Services Authority, Final Notice, 27 June 2012, Para 112 Back

71   Qq 127, 129 Back

72   Financial Services Authority, Final Notice, 27 June 2012, Para 115 Back

73   Qq 1167-1168 Back

74   Financial Times, Libor's value is called into question, by Gillian Tett, 25 September 2007 Back

75   Wall Street Journal, Bankers Cast Doubt On Key Rate Amid Crisis by Carrick Mollenkamp, 16 April 2008 Back

76   Wall Street Journal, Bankers Cast Doubt On Key Rate Amid Crisis by Carrick Mollenkamp, 16 April 2008 Back

77   Wall Street Journal, Study Casts Doubt on Key Rate, By CARRICK MOLLENKAMP and MARK WHITEHOUSE, 29 May 2008 Back

78   Wall Street Journal, Study Casts Doubt on Key Rate, By CARRICK MOLLENKAMP and MARK WHITEHOUSE, 29 May 2008 Back

79   Wall Street Journal, Study Casts Doubt on Key Rate, By CARRICK MOLLENKAMP and MARK WHITEHOUSE, 29 May 2008 Back

80   Bloomberg, Libor Banks Misstated Rates, Bond at Barclays Says (Update2), By Gavin Finch and Elliott Gotkine ,May 29, 2008 Back

81   Bank for International Settlements, Interbank rate fixings during the recent turmoil , Jacob Gyntelberg and Philip Wooldridge , March 2008 BIS Quarterly Review ,p 65 Back

82   Bank for International Settlements, Interbank rate fixings during the recent turmoil , Jacob Gyntelberg and Philip Wooldridge , March 2008 BIS Quarterly Review ,p 70 Back

83   Abrantes-Metz, Rosa M., Kraten, Michael, Metz, Albert D. and Seow, Gim, LIBOR Manipulation? (August 4, 2008). Available at SSRN: or Back

84   HC (2012-13) 535, Q 112 Back

85   Q 460 Back

86   Bank of England, BANK OF ENGLAND STERLING MONEY MARKETS LIAISON GROUP, Thursday 15 November 2007 Bank of England, MINUTES, Paras 2.1-2.2 Back

87   Q 433 Back

88   Supplementary memorandum to the Treasury Committee by Paul Tucker, 16 July 2012 Back

89   HC (2012-2013) 535, Q 57 Back

90   Letter from Lord Turner to the Chairman of the Treasury Select Committee, 24 July 2012 Back

91   Federal Reserve Bank of New York, New York Fed Responds to Congressional Request for Information on Barclays - LIBOR Matter, July 13, 2012  Back

92   Federal Reserve Bank of New York, New York Fed Responds to Congressional Request for Information on Barclays - LIBOR Matter, July 13, 2012  Back

93   Federal Reserve Bank of New York, New York Fed Responds to Congressional Request for Information on Barclays - LIBOR Matter, July 13, 2012  Back

94   Bank of England, Timeline of Bank/Federal Reserve/BBA communications about BBA Libor Review in 2008, 20 July 2012 Back

95   Federal Reserve Bank of New York, New York Fed Responds to Congressional Request for Information on Barclays - LIBOR Matter, July 13, 2012  Back

96   Federal Reserve Bank of New York, New York Fed Responds to Congressional Request for Information on Barclays - LIBOR Matter, July 13, 2012  Back

97   FRBNY Markets and Research and Statistics Groups, Recommendations for Enhancing the Credibility of LIBOR, May 27, 2008. Part of Federal Reserve Bank of New York, New York Fed Responds to Congressional Request for Information on Barclays - LIBOR Matter, July 13, 2012 Back

98   HC (2012-13) 535, Q 42 Back

99   HC (2012-13) 535, Q 55 Back

100   HC (2012-13) 535 , Qq 45-51 Back

101   Bank of England, News Release, Further information and correspondence in relation to the BBA Libor Review in 2008, 20 July 2012 Back

102   Letter from Lord Turner to the Chairman of the Treasury Select Committee, 24 July 2012 Back

103   Bank of England, News Release, Further information and correspondence in relation to the BBA Libor Review in 2008, 20 July 2012 Back

104   Bank of England, News Release, Further information and correspondence in relation to the BBA Libor Review in 2008, 20 July 2012 Back

105   Bank of England, News Release, Further information and correspondence in relation to the BBA Libor Review in 2008, 20 July 2012 Back

106   Bank of England, News Release, Further information and correspondence in relation to the BBA Libor Review in 2008, 20 July 2012 Back

107   Bank of England, News Release, Further information and correspondence in relation to the BBA Libor Review in 2008, 20 July 2012 Back

108   Bank of England, News Release, Further information and correspondence in relation to the BBA Libor Review in 2008, 20 July 2012 Back

109   Letter from the assistant private secretary to the Governor of the Bank of England to the Clerk of the Treasury Committee, 23 July 2012  Back

110   HC (2012-13) 535 , Q 90 Back

111   Letter from Lord Turner to the Chairman of the Treasury Select Committee, 24 July 2012 Back

112   Bank of England, BANK / BBA MEETING, 25 April 2008 Back

113   Financial Services Authority, Final Notice, 27 June 2012, para 145 Back

114   Barclays, Supplementary information regarding Barclays settlement with the Authorities in respect of their investigations into the submission of various interbank offered rates (Amended), 3 July 2012 Back

115   Q 1129 Back

116   Q 1087 Back

117   Qq 649-651 Back

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© Parliamentary copyright 2012
Prepared 18 August 2012