* Probe uncovered 26 references to lowballing
* FSA says trader manipulation far harder to spot
* FSA says was focused on checking if banks viable
* Bank of England says passed on concerns to FSA
By Huw Jones
LONDON, March 5 Britain's financial watchdog
said it should have been faster in spotting how banks
"lowballed" Libor benchmark interest rates but stopped short of
admitting to major regulatory failure.
After pressure from UK lawmakers in a scandal that has seen
top bankers depart and banks fined billions of pounds, the FSA
published a 103-page internal report into when it first knew
about manipulation of the London Interbank Offered Rate (Libor).
Regulators around the world are still probing banks, traders
and brokers that help set a rate used to price trillions of
dollars of products from credit cards to home loans.
FSA Chairman Adair Turner said that at the time the watchdog
had no direct oversight of Libor, and therefore "did not respond
rapidly to clues that lowballing might be occurring", referring
to banks submitting artificially low quotes to Libor compilation
to give the impression they were having no difficulty borrowing
money at the height of the 2007-09 financial crisis.
"The report also reveals that while some information was
available relating to lowballing, there is, for the period
covered, no evidence of any information, direct or indirect,
available to the FSA which indicated that traders were
manipulating Libor for profit," Turner said.
The FSA conceded it was too narrowly focused in its handling
of Libor-related information, should have considered that it was
likely Libor was being lowballed given cumulative information
and should have better managed the information it did receive.
Two UK banks, RBS, Barclays, and Swiss UBS
have been fined for rigging Libor and other benchmark
rates, with others expected to settle similar charges soon.
The benchmark is compiled from banks submitting quotes for
interest rates at which they say they could borrow.
Andrew Tyrie, who chairs parliament's Treasury Select
Committee, which requested the report, said it confirmed
lawmaker concerns that the watchdog was slow to act on evidence.
The Bank of England, which also came under fire from UK
lawmakers, said in a statement on Tuesday it was widely known
that the Libor market had effectively closed as the 2007-09
financial crisis unfolded.
"This report shows that, where the Bank was aware of market
rumours about the process for setting Libor, it passed them
promptly to the regulator - the FSA," the central bank said.
The three banks were fined for manipulating Libor to make
money on their derivatives contracts, or for low-balling.
The probe, which cost 600,000 pounds, covered January 2007
to May 2009 when markets were in turmoil and regulators were
focusing on the "very viability" of lenders.
It searched 17 million records, reviewed 97,000 documents
and interviewed 20 FSA staff or former staff.
It found 26 direct references to potential or actual
lowballing, including two telephone calls from Barclays in March
and April 2008, described as "the clearest contacts that
indicated an individual bank was lowballing".
The FSA, which will be scrapped on March 31 and its bank
supervisory tasks handed to the Bank of England, with a new
standalone Financial Conduct Authority to handle enforcement,
also published a 25-page management response to its report
The response said that the FSA's Martin Wheatley, who will
head the new FCA, and the Bank of England's top banking
supervisor Andrew Bailey accepted the main report's findings.
The management response said articles published by the Bank
for International Settlements and the International Monetary
Fund had argued that Libor was not being manipulated.
Neither the U.S. Commodity Futures Trading Commission nor
the FSA were aware of Libor manipulation by traders until 2008
when evidence emerged while looking into lowballing, it added.
"The British Bankers' Association did not raise concerns
over the conduct of market participants with the FSA," the FSA
management response said, referring to the industry association
which governs Libor.
Identifying trader manipulation in real time would have
required "very large and perhaps disproportionate" staffing when
direct supervision was not a legal requirement.
Tyrie said the FSA's successor bodies would need to do
better and Treasury Committee scrutiny would be intensive.
The report makes several recommendations to the Bank of
England and the FCA, such as making sure staff circulate
information internally better and are more inquiring.
Wheatley has already proposed reforming how Libor is set by
stripping the BBA of its Libor governance role, introducing
direct supervision, and criminal punishment for gaming rates.