BBA and BoE aware of banks submitting false rates – Libor trial

Trade association didn't have power to censure rule breakers

Bank of England: knew about Libor flaws

Senior members of the trade association controlling Libor were aware the rate was being abused as early as 2005, the court heard today (June 5) in the trial of former UBS and Citigroup trader Tom Hayes.

Hayes is accused of eight counts of conspiracy to defraud from alleged manipulation of the London interbank offered rate (Libor), which is linked to trillions of dollars of financial products.

Senior bankers from the banks involved in setting Libor were interviewed annually by the British Bankers' Association (BBA) to monitor the sometimes controversial benchmark and gather industry views on how to improve it.

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"There is consensus amongst banks that sterling Libor and US dollar are being set 3–4 basis points above the true cash rate," John Ewan, in charge of Libor at the BBA between 2006 and 2010, wrote in a summary to one such report from 2005.

Libor depends on a panel of banks submitting their view of the cost of borrowing funds from another bank by 11am each working day.

The prosecution alleges Hayes and other traders encouraged Libor setters to fix the rate at a number that would help them make money from their trading positions, rather than setting it based on the actual cash rate in the market.

"This is a major problem and must be fixed," was the view of one Credit Suisse representative.

The representative from HBOS was quoted as saying: "Some companies will quote rates to suit their current position. It has always been the way."

The court heard similar comments from later reviews up to the period of the financial crisis in 2007 and 2008.

"It's a bloody mess and most certainly not a science," wrote one HSBC representative in 2007.

Ewan and Sally Scutt, deputy chief executive of the BBA during the period in question, both acknowledged that issues of banks altering Libor from the cash value were well understood within the organisation.

"We would hear repeated allegations that were never actual smoking guns," Ewan told the court.

The court was also shown emails from Michael Cross, Bank of England head of the sterling markets division and head of market intelligence, sent in June 2008, demonstrating the UK's central bank was aware of problems with Libor.

"Amongst many market participants there has long been concern expressed about whether Libor can be manipulated," Cross wrote in an email to Alex Merriman, at the time executive director of the BBA's wholesale and financial market infrastructure teams.

Despite the widespread knowledge of problems with Libor manipulation, no major changes were made to the process of setting the benchmark.

Ewan said the BBA's strategy to deal with the potential rate manipulation was to write "regularly to the committee banks reminding them of the definition" and for BBA chief executive at the time, Angela Knight, to "urge [panel banks] to ensure the rates were accurate".

He said more drastic measures, including changing the definition of how the benchmark was calculated, were discussed but not pursued because of the potential damage caused to long-term financial products linked to Libor.

The trial continues.