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Bank of England Libor Scandal | ASHARQ AL-AWSAT English Archive 2005 -2017
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The Bank of England is seen in the City of London August 7, 2013. REUTERS/Toby Melville

Cairo – Amid the tough times Britain has to face, British Broadcasting Company (BBC) published secret recording that implicates the Bank of England (BoE) in Libor rigging. The recordings date back to 2008 and show that the central bank pressured commercial banks during the financial crisis to push their Libor rates down.

Libor, the London Interbank Offered Rate, at which banks lend to each other, setting a benchmark for mortgages and loans for ordinary customers. BoE argues that Libor was not regulated in the UK at the time.

The recordings call into question evidence given in 2012 to the Treasury select committee by former Barclay’s boss Bob Diamond and Paul Tucker.

Tucker became the deputy governor of the Bank of England.

Libor tracks how much it costs banks to borrow money from each other and has a big influence on the cost of mortgages and other loans. Banks setting artificially low Libor rates is called lowballing.

In the recording, a senior Barclays manager, Mark Dearlove instructs Libor submitter Peter Johnson, to lower his Libor rates.

The phone call took place on 29 October 2008 during which Dearlove told Johnson that: “The bottom line is you’re going to absolutely hate this… but we’ve had some very serious pressure from the UK government and the Bank of England about pushing our Libors lower.”

Johnson objected saying that this would mean breaking the rules for setting Libor, which required him to put in rates based only on the cost of borrowing cash. He asked Dearlove: “So I’ll push them below a realistic level of where I think I can get money?”

Dearlove replied: “The fact of the matter is we’ve got the Bank of England, all sorts of people involved in the whole thing… I am as reluctant as you are… these guys have just turned around and said just do it.”

Until recently a member of staff at each of the biggest banks, the Libor submitter would say what interest rate they thought the bank would have to pay to borrow money, according to BBC. An average would be taken to arrive at Libor.

Banks have been fined more than £6 billion for allowing Libor submitters to be influenced by requests from traders or bosses to take into account the bank’s commercial interests, such as trading positions.

The scandal is expected to create financial chaos in Britain, yet BoE continues its attempts to contain the risks that could result from Brexit.

BoE gave financial firms a deadline of July 14 to explain how they are planning for UK’s departure from the EU and warned them to be ready for all possible outcomes, including a hard Brexit.

BoE governor Mark Carney said central banks and financial firms should be planning for “all eventualities”.

Carney delivered a speech on Friday for the England Thomson Reuters Foundation and called for an open financial system between the UK and the EU post-Brexit.

Carney said the main purpose of the letter was to ensure “all firms are making, and stand ready to execute in good time should the need arise, contingency plans for the full range of possible scenarios”.

The outcome of the Brexit negotiations could prove highly influential in determining which path the global financial system takes.

The move follows Prime Minister Theresa May’s triggering of article 50 last week, formally launching the Brexit process.

The insurers Lloyd’s of London and Royal London are setting up subsidiaries outside the UK, while the investment banks JP Morgan, Citigroup, Goldman Sachs, and HSBC are actively exploring the options of relocating outside UK.

The Bank wrote to hundreds of banks, insurers and other financial firms ordering them to get contingency plans in place.

A key concern for financial firms is whether the UK will still hold the “passporting” rights that allow British-based banks and insurers to do business with the rest of the EU after Brexit.

“London is Europe’s investment banker, with UK-based firms involved in over half of debt and equity issuance by EU27 borrowers. Over three-quarters of foreign exchange and OTC interest rate derivatives trading in the EU takes place here. This concentration of activity increases efficiencies and lowers fees for European end users, while reducing the risks associated with complex finance to European real economies,” said Carney.

Sam Woods, the Bank’s deputy governor for prudential regulation and head of the Prudential Regulation Authority, wrote in Friday’s letter: “Many firms are well-advanced in their planning and have engaged closely with the PRA as part of that process. However, our current assessment is that the level of planning is uneven across firms and plans may not be being sufficiently tested against the most adverse potential outcomes.”

BoE is proposing to introduce a “fund-based” deposit facility for Islamic banks, which would allow them to obtain access to additional liquidity when necessary in a way that is compliant with sharia law.

In a statement, the Bank said that the plans were “part of the bank’s more general approach to broadening market access to central bank liquidity facilities”.

“The bank recognizes that Islamic banks are currently unable to use the bank’s existing facilities because they involve interest, which is not deemed sharia compliant,” it said.

Earlier this week, Bank of England Monetary Policy Committee member Gertjan Vlieghe delivered a set-piece speech at Bloomberg’s European headquarters to discuss the future of economic forecasting in the context of Britain’s exit from the EU.

“Caution is warranted,” said Vlieghe as he argued that now was not the time to raise interest rates.

“The consumer slowdown, which initially didn’t materialize, now appears to be under way,” Vlieghe argued that rates should stay put at an ultra-low 0.25pc.

British consumer spending increased at the slowest annual pace in more than three years in the first three months of 2017, in a further sign that one of the economy’s main engines is losing steam as Brexit preparations begin, a survey showed on Monday.

Payment card company Visa said real-terms spending increased 0.9 percent year-on-year in the three months to March, the weakest calendar-quarter performance since late 2013 and down from 2.7 percent in the last quarter of 2016.

In March, spending dropped 0.7 percent compared with the previous month, after being flat in February.

Visa’s monthly figures are based on spending on its credit and debit cards, which it says account for about a third of consumer spending in Britain.