LONDON/WASHINGTON The Bank of England confirmed on Friday it had received U.S. recommendations to overhaul the Libor benchmark at the heart of a global rate-rigging scandal, saying it had passed them on to the banking group responsible for the rate.
Documents obtained by Reuters earlier on Friday showed that U.S. Treasury Secretary Timothy Geithner pressed the British central bank in June 2008 to make changes to the way that the widely used interest rate benchmark was set.
Geithner, who was the head of the New York Federal Reserve Bank at the time, sent a private email to BoE Governor Mervyn King recommending six ways to enhance the credibility of the London interbank offered rate.
The BoE passed on Geithner's thoughts in an email to the British Bankers Association (BBA) - the banking group responsible for Libor - which at that stage had already decided to launch a review of the rate.
"Both the Bank and the Federal Reserve were assured by the BBA that it would take on board the recommendations, either through actions or through questions on which it would consult," the BoE said in a news release.
More than a dozen banks are under investigation by authorities in Europe, Japan and the United States over suspected rigging of Libor, which is used in financial contracts worth hundreds of trillions of dollars globally.
The June 1, 2008 email, first reported by the Washington Post, included a two-page memo dated May 27 of that year that suggested establishing best practices for calculating Libor, "including procedures designed to prevent accidental or deliberate misreporting."
It recommended the British Bankers' Association require that auditors for banks reporting their borrowing costs for the calculation of Libor attest to the accuracy of their rates.
The New York Fed is due to release documents later on Friday that it has said will show it took "prompt action" four years ago to highlight problems with Libor.
NO SHOW STOPPER
The Bank of England also published a number of emails between members of its staff, and the BBA.
"Changes are being made to incorporate the views of the Fed. There is no show stopper as far as we can see," Angela Knight, the BBA's former head, said in a June 3 email to Paul Tucker, who was then the BoE's executive director for markets.
He is currently deputy governor and a candidate to replace King at the top.
London-based Barclays is the only bank so far to admit any wrongdoing in giving false information as part of the complex process of setting Libor, in order to influence the pricing of derivatives and also to rebut speculation about the weakness of its balance sheet during the financial crisis.
Barclays agreed to pay fines of $453 million in a settlement with U.S. and British officials. Libor is used for $550 trillion of interest rate derivatives contracts, and influences rates from mortgages to student loans to credit cards.
The scandal so far has been mostly confined to London, with public outcry that regulation in Britain was lax. But concern has grown about the wider impact on consumers and the involvement of U.S. regulators.
The BBA came out with a policy paper in November 2008 that included proposed changes such as improved governance structures and disciplinary procedures, and better scrutiny and analysis of the data collected for setting the rate.
A group of Democratic senators on Thursday pushed for the U.S. Justice Department and financial regulators to step up investigations into whether global banks manipulated the interest rate benchmark. U.S. state attorneys general are also jumping into the widening scandal, a move that could open a new front against the top global banks.
In his email, Geithner suggested one way to "eliminate (the) incentive to misreport" would be to randomly select a subset of 16 reporting banks and calculate an average after discarding the highest and lowest values, without identifying which banks may have had unusually high or low borrowing costs.
During the 2007-2009 financial crisis, the borrowing costs of many banks soared as counterparties worried about their health. Some banks may not have wanted their high borrowing costs to become public out of fear it may have fueled concern about their viability.
It is not clear how far the New York Fed pressed any concerns it may have had. The New York Fed declined to comment.
Thomson Reuters Corp is the British Bankers' Association's official agent for the daily calculation and publishing of Libor. The company said it continues to support the BBA in calculating and distributing Libor rates.
(Additional reporting By John Crawley, Additional writing by Douwe Miedema,; Editing by Jeremy Gaunt)