parliamentary commission on banking standards appointed July 17, 2012
Posted by Bradley in : financial regulation , add a commenta joint Committee appointed by the House of Commons and the House of Lords to consider and report on: professional standards and culture of the UK banking sector, taking account of regulatory and competition investigations into the LIBOR rate-setting process.. lessons to be learned about corporate governance, transparency and conflicts of interest, and their implications for regulation and for Government policy
The members of the committee are Andrew Tyrie, Chairman, Mark Garnier, Andy Love, Pat McFadden, John Thurso, Lord Turnbull, Baroness Kramer, Lord Lawson, Lord McFall, and the Bishop of Durham.
financial stability and libor July 17, 2012
Posted by Bradley in : financial regulation , add a commentThe Treasury Committee, meeting today to discuss the Bank of England’s June 2012 Financial Stability Report began by picking up where they left off yesterday with Turner asking why King was involved in the discussions with Agius about Diamond’s position at Barclays. Andrew Tyrie asked why, when the FSA was the regulator, the Bank of England was involved. Turner insisted on the legitimacy of the Bank of England’s concern with confidence in banks given the Bank’s role in providing liquidity support to banks. And he said the FSA was not taking the position as the regulator that Diamond was not fit and proper (it was not a formal direction). Tyrie expressed some concern for the future that the position of chief executives of banks should not hang on the whim of some future Governor of the Bank of England.
On the issue about whether the Bank encouraged lowering of Libor quotes, there are some newly released emails. And Tucker was in the hot seat over this issue again.
When central bankers meet at Basel every couple of months there is a smaller group of major countries that meets, King says, in the context of questions about his interactions with Geithner over Libor governance.
Meanwhile there are news stories about other competitors to Libor based on actual transactions, for example the DTCC GCF Repo Index and AFMA’s bank bill swap reference rates. Ben Bernanke, giving evidence to the Senate Committee on Banking, Housing and Urban Affairs, commented unfavourably on the lack of responsiveness of Libor to the US suggestions for governance changes and suggested that transaction based measures of interest rates were preferable.
uk libor hearings July 16, 2012
Posted by Bradley in : financial regulation , add a commentAt the Treasury Select Committee Jerry del Missier appeared. Neither del Missier nor the Committee seemed on top form here. They went round and round – committee members tried to get him to make damaging admissions, and what they got was mostly that he didn’t know what was going on.
Then the FSA team: Turner, Bailey, McDermott. Bailey and Turner seem pretty clear that Diamond’s evidence to the Committee gave a not very accurate impression of Bailey’s visit to Barclays and the Turner letter. Turner said that his letter was the only letter he had sent of this type as Chairman of the FSA. Barclays was a problem in terms of its attitude to regulation. The Committee members were competing with each other over how critical to be about the FSA and its response to the Libor fixing issues, with a number of references to ordinary people and what they would think about the whole thing.
geithner to king re: libor July 13, 2012
Posted by Bradley in : financial regulation , add a commentThe Bank of England published communications between Geithner and King in May 2008 with respect to ideas for changes to the BBA governance arrangements. That the then President of the Federal Reserve Bank of New York should be seeking to affect the way in which Libor is calculated is odd, given the origins of US dollar Libor as an offshore rate. US dollar Libor developed to avoid interest rate controls in the US. Of course, by 2008 Libor had become standardized and had moved back into the US as a rate of interest used in domestic US transactions, so the history wasn’t so relevant. Still, the idea of federal reserve/central bankers in the UK and US co-operating over the governance of Libor is interesting.
As to what Geithner proposed, as well as some sensible-seeming governance suggestions, for example that Bank auditors be expected to attest to the accuracy of banks’ Libor rates, and an idea of establishing random sampling of rates submitted by an expanded set of contributor banks to minimize misreporting, there are some other rather different suggestions. For example, Geithner says that more US banks should be involved in Libor fixing (and this would surely help improve the profile of these banks). He also suggests a second fixing after the US markets open because this would be more indicative of conditions while the US market was open. But Libor was supposed to reflect rates in London and not in New York. Now, it is true that whereas in the early days there were divergences between Libor and domestic US rates, over time there was a convergence. But what to make of this? To force greater convergence or not? I find the combination of these suggestions (with King’s response that the Bank of England would ask the BBA to include them in its consultation document) with the language early in the Geithner memo about enhancing “perceptions of the BBA as an objective intermediary in the rate-setting process” to be rather odd. Was the BBA to be the Fed’s poodle or an objective intermediary? Was Libor to be a rate derived from the market or one managed by central banks?
The New York Fed also released documents this morning for the forthcoming Congressional hearings into Libor. These documents raise one question which doesn’t really feature (yet) in all of the inquiries and investigations into what happened, and that is why, given that it looks as though there really wasn’t an effective interbank market frequently during the crisis, no-one seems to have thought to recognise that fact. After all, documentation for Libor-based transactions has contained language providing for what happens if there is no Libor since inception.
So now back to the Geithner memo. How can a mechanism to feed US market based rates into Libor fixing be a solution to a problem that Libor does not in fact reflect what it purports to reflect which is rates in the London interbank market? There seems to me to be a transparency issue here.
libor and the treasury select committee: next steps July 11, 2012
Posted by Bradley in : financial regulation , add a commentNext Monday the Committee will hear from Jerry del Missier, Adair Turner, Andrew Bailey and Tracey McDermott.
financial services lobbying July 10, 2012
Posted by Bradley in : financial regulation, lobbying , add a commentThe Bureau of Investigative Journalism has published a number of articles about lobbying in the financial services context including this one about the FSA’s meetings with trade groups (and here’s the link to the story at the Guardian) which refers to minutes of meetings (which I would love to see). But of course these meetings happened in a context where politicians were telling regulators not to over-regulate, and not to gold-plate EU measures. The directive not to over-regulate came from the same place as Agius’ comments about the competitive international context in which Barclays operates, and trade associations have been dedicating huge amounts of effort for years not just to meeting with politicians and regulators but to developing sophisticated rhetorical and even theoretical arguments to support what they want from regulation. I remember one announcement for an FSA conference which explicitly stated that it would provide an opportunity for regulated firms to interact with their regulator. And, in December 2008 I asked:
whether it is really possible to have effective representation of consumer interests in a structure where the consumer representation is funded by a regulator which is committed to not frightening regulated firms too badly.
On some issues we seem to have moved on a bit from this point. But as to the larger question of how we develop policy in an environment with appropriate levels of scepticism about the arguments financial firms make about regulation, I am not at all sure. And by appropriate levels here I am concerned not only with the risk that regulation may be too lax but also that sometimes it may be too restrictive.
treasury select committee: libor hearings July 10, 2012
Posted by Bradley in : financial regulation , add a commentThe Committee published letters between the FSA and Barclays which have been the subject of discussion during Marcus Agius and the Committee today. Adair Turner expressed the FSA’s displeasure in April 2012 with Barclays’ behaviour. He wrote:
it is of course acceptable for a bank to argue for a favourable approach on any one specific issue, even if the regulator does not immediately agree. But the cumulative effect of the examples set out above has been to leave us with an impression that Barclays has a tendency continually to seek advantage from complex structures or favourable regulatory interpretations. These concerns are sufficiently great that I felt it was appropriate to communicate them directly to you, and to urge you and the Board to encourage a tone of full co-operation and transparency between all levels of your Executive and the FSA.
When questioned about this, Agius says that the job of a regulated firm is to act absolutely within the regulations but that they also operate within an extraordinarily competitive international industry and, within the constraints of regulation and law, their job is to do the best they can for their stakeholders. Earlier he commented that when a bank deals with its regulator it isn’t like dealing with a speed cop about driving over 30 mph in a 30 mph zone – it’s more complex than that.
The Committee spent a lot of time on the question whether Diamond misled them last week – before these letters were made available – about how the FSA characterized Barclays’ attitude to regulatory compliance in early 2012. The Committee focuses on Turner’s letter as representing the FSA’s attitude and Agius tries to argue that Diamond had been referring to Andrew Bailey’s earlier visit to the Barclays Board. Given the wording of the April 12th letter it’s difficult to understand how Agius thinks he can succeed in soft pedaling what was going on. In response to a characterization of the April 12th letter as “damning”, Agius says it is a “firm” letter from a regulator.
Members of the committee expressed surprise that Barclays does not record Board meetings (an intriguing idea for corporate governance reform, but surely unlikely to be adopted), and about the number of things Agius claimed not to know about. At one point he reminded the committee of the limited role of a Board. He resisted attempts to get him to express views on what Diamond was doing last week, or at various points during his tenure at Barclays.
For “a formidable financier with an eye for detail” I did not find Agius’ performance to be impressive. On the other hand he did spend quite a bit of time in the hot seat without saying very much (apart from the fact that King sought Diamond’s resignation and about how much Diamond will take when he walks away) and perhaps that was the point. But he didn’t give a very good impression of the state of UK banking.
more libor, more questions about financial regulation July 9, 2012
Posted by Bradley in : financial regulation , add a commentPaul Tucker spoke to the Treasury Select Committee this afternoon, denying that the Bank of England had any responsibility with respect to Libor or the BBA, commenting on how difficult things were during the financial crisis, and expressing support for a twin peaks system of financial regulation. Of course these hearings are happening at a time when the UK Parliament is addressing issues of financial regulation with a Financial Services Bill in progress and a Banking Bill to come. Some of the personnel involved in regulation will continue to be involved in the new regimes, so those people have an interest in influencing how the changes are made. And one issue is how much enforcement power the regulators have. Members of the committee noted that the Barclays settlement resulted in significant part from the efforts of the US agencies involved. Regulators often want to blame problems on other jurisdictions. For example, giving evidence on swaps to the House Financial Services Committee Gary Gensler of the CFTC said last month (with a number of specific examples of harm caused to the US by actions outside the US in other regulators’ jurisdictions):
Balanced implementation of regulatory reform requires an acknowledgment that the activities of financial institutions engaging in transactions or setting up operations abroad can pose a profound threat to U.S. taxpayers and the economy.
Was it convenient for the CFTC/DOJ that the first bank to settle over Libor was not a US bank? Citigroup and JP Morgan are among the targets of investigators.
Michel Barnier has also commented on the Libor problem:
L’actualité le démontre avec l’affaire Barclays et la manipulation du taux de refinancement des banques, les comportements scandaleux restent possibles sur les marchés financiers. Les travaux sont en cours au sein de votre Commission pour renforcer la lutte contre les manipulations de marché et sanctionner les abus… Je considère que nous devrons sans doute renforcer ces textes pour couvrir plus directement de telles manipulations.
serious frauds office to investigate libor July 6, 2012
Posted by Bradley in : financial regulation , add a commentHere is the SFO press release. Here is the link to yesterday’s House of Commons debate on professional standards in banking. Reading the debate isn’t very edifying. Much more attention seems to be focused on finding ways to blame the last government for failures in regulation than on how to regulate better for the future. And it is mind-blowing to see the Chancellor blaming what has happened on failures of regulation when before the financial crisis Conservatives were even more vocal than the last Labour Government about how regulation shouldn’t interfere with the ability of UK banks and the City to compete with banks based in other jurisdictions and other financial centres.
libor: politics and financial regulation July 5, 2012
Posted by Bradley in : financial regulation , add a commentBob Diamond appeared before the Treasury Select Committee yesterday to discuss Libor. On one level the reviews in Parliament and at the FSA are supposed to be about working out how to ensure this particular problem doesn’t recur. And the options on the table seem to be very focused on Libor. Should the regulators require that Libor be based on transactions rather than on opinions, should setting Libor be a regulated activity etc. We have seen some hints that the issue is seen as part of a larger issue – the banking culture issue – but that is both more significant and harder to find a regulatory fix for.
There’s another larger issue here. Financial stability concerns make regulators focus on systemically important financial institutions (for example this recent Basel Committee Consultation on domestic systemically important banks). But what about trying to identify the point at which practices become systemically important? Some years ago, when Libor was a bespoke rate fixed by mechanisms specified in individual transaction documents it wasn’t one rate that all could use. According to the BBA’s website, banks asked it to work on providing uniformity:
The BBA was asked by the banks it represents to bring a measure of uniformity into the market and to devise a benchmark to act as a reference for these new instruments. Rather than negotiating the underlying rate or forming rates by taking averages of ad-hoc panels, banks could now use a standard rate. This facilitated the operation of markets and made benchmarking more transparent and objective.
The standardization of Libor increased its use as a rate of interest across a range of transactions around the world. But standardization may be a source of systemic risk if it makes particular behaviours more pervasive. We know that the way in which securitizations were structured involved invisible systemic risks. We are dealing with issues around the regulation of derivatives. But all of these issues are linked by standardization of financial transactions and practices.
Then there’s the politics. Did the Government or Bank of England encourage banks to manipulate Libor during the financial crisis. This issue is going to hang around for a while. The press likes it. Paul Tucker wants to speak to the Treasury Select Committee to clarify what he said in October 2008. But any financial regulation, and a lot of normal governmental activity, affects the way the markets work. Rescues of failing financial firms involve some manipulation of the financial markets. Will Spinney at the ACT gives a number of examples of governmental manipulation of financial markets. I wrote a short paper about the crisis where I said:
The global financial crisis thus renders visible and urgent a perennial (although often ignored) tension in financial regulation with respect to the extent to which governments should intervene to fix the financial markets.
This issue deserves more serious consideration than the irresponsible throwing around of partisan criticism we are seeing – reminiscent of snowball fights in a playground (or whatever they do at Eton) – that it is getting. Precisely what governmental interventions in the financial markets are legitimate, and what are not?
update: Note Jonathan Portes:
The lack of discussion about the structure of these key funding markets in any of the UK banking reform proposals is a very serious omission.