The ACT welcomes the Review and reiterates its belief in the importance of LIBOR type rates to the real economy, encompassing small, medium and large businesses – we need honest and transparent markets. The real fear is a reduced willingness of banks to continue to make rate submissions where good faith judgements are necessary in arriving at the rate to be contributed. To participate the banks need a robust legal framework. We need confidence that there is a well governed process and consider that this should be the responsibility of the authorities not a trade body. The legal and reputational risks arising from bad faith and compliance failure are very large. 'Look-back' risk when evaluating a judgement, even one made reasonably, after proper process, is always a concern for anyone involved. Banks need a robust legal framework for this. Dismantling the current system would be particularly damaging, given the absence of suitable alternatives to provide continuity. The default alternative to LIBOR in its original use related to business borrowings is a return to a system of individual panels, lacking any governance that disadvantages small- and medium-sized enterprises in particular. The mooted widening of the LIBOR definition to have regard to a bank’s funding rates from the wholesale money markets more widely is welcomed given the low volume of inter-bank transactions. Indeed, it is those thin inter-bank volumes that render a move to a 'transaction-only' or 'judgement-free' version of LIBOR impossible. Also, it is wrong to assume that transactions are not themselves vulnerable to manipulation. There needs to be a clear legal framework to ensure that banks can participate without exposing themselves to more reputational risk than they can reasonably bear. Banks are concerned about supplying LIBOR estimates now. They fear criticism and legal action, even if they are doing what they consider to be a good job. This is partly because any sound system requires judgements to be made when the institution does not borrow for a particular currency and period or when actual dealt rates have been distorted by special considerations applicable to the deals or when the deals were not done at the required time. John Grout, ACT’s Policy and Technical Director, said:
We think the main concern is that banks need a robust legal framework to give them confidence to go on submitting rates to reference rate compilers and we need to know that regulators and supervisors have the powers they need to police matters, with proper governance and supervision in place. The baby must not be thrown out with the bath water.
NOTES TO EDITORS 1. The ACT comments are in response to The Wheatley Review of LIBOR: initial discussion paper 2. The full text of The ACT response to the Wheatley Review of LIBOR is available here