The Financial Services Authority has admitted there are “legitimate questions” to be asked about its failure to spot Libor rigging by the banks in the build-up to the financial crisis.
Lord Turner, the FSA chairman, told MPs on the Treasury select committee (TSC) that there were three occasions in 2007 and 2008 when the regulator should have been alerted to the scandal, but the issue was overlooked because the messages were relayed to “junior staff”.
Part of the blame, he insisted, lay with Barclays because the bank did not properly disclose its own misconduct in any of the 13 attempts it made to inform the FSA that rivals were manipulating the key inter-bank lending rate. Lord Turner said he had ordered an internal investigation into why the repeated warnings were missed.The failure of the FSA to spot Libor rigging cannot be blamed on missing three occasions or Barclays not disclosing its own misconduct.
The failure of the FSA rests entirely on the fact that FSA did not see that Libor and similar self-reported index prices could be rigged in the first place.
Regular readers know that the first priority for all financial regulators is making sure that market participants have access to all the useful, relevant information in an appropriate, timely manner so they can make a fully informed investment decision.
FSA failed because Libor interest rates are not set in a manner that is consistent with achieving this first priority. In fact, Libor interest rates are deliberately set in an opaque manner so that banks can collude and engage in oligopolistic pricing for their benefit.
FSA failed because it did not insist in 2008 that Libor interest rates be based off of a subset of all the fully disclosed actual funding trades made by the banks in the Libor panel.