A review out today from the Financial Services Authority has said the Libor system is no longer “fit for purpose”, after the fixing scandal last month.
The FSA’s managing director, Martin Wheatley, reviewed the Libor system after Barclays bank were found to have been rigging the rates which set interest rates.
Today’s announcement called for an overhaul of the system, with Mr Wheatley saying in a speech: “The existing structure and governance of Lior is no longer fit for purpose and reform is needed.”
The suggested alternative is to base interest rates on actual market data, rather than receiving this information through the banks. This system would be intended to increase transparency and improve public confidence.
The Wheatley Review further suggests that governance of the Libor setting should be independent, penalties should be set in more concrete terms and calculations should also be managed outside of the British Board of Agrement.
The suggestion of alternative benchmarks for some transactions was also put forward.
Wheatley advised that the Libor may not be able replaceable immediately, and perhaps not ever entirely because of the number of contracts that rely on the system.
He said: “The short and medium term focus has to fix Libor and then there is a broader question about whether there are better rates going forward.”
Dr Neil Bentley, CBI Deputy Director-General, commented: “The Review’s initial thinking on the LIBOR issues is a sensible direction to take in order to restore confidence in this area and in our banking system more widely.
“We welcome the focus on moving towards more transaction-based data for setting benchmark rates, improving internal governance within the banks, and strengthening the accountability of individuals.”