EU’s Reding slams ‘bankster’ culture, raps Bank of England

Viviane Reding Picnik_0.jpg

The European Commission warned yesterday (25 July) that the EU could take over supervision of benchmark interest rate indexes such as London's Libor, with EU Justice chief Viviane Reding unleashing a broadside at the Bank of England for its failure to stamp out rigging.

Manipulation of Libor, which is used to set prices for trillions of dollars of financial products around the globe, resulted in a €373-million penalty for Barclays Bank last month.

Bob Diamond, the British banks chief, was forced to resign and the scandal threatens to drag several other banks into the rate-fixing scandal.

Announcing measures to criminalise index fixing, Michel Barnier, the European commissioner for the internal market, said he was examining tighter supervision of such benchmarks and questioned their current method of calculation.

Banks currently supervise the London Interbank Offered Rate, or Libor, and its continental European equivalent Euribor themselves. But self-regulation is set to end.

"Everything has been put on the table except one and that is that of status quo and self regulation," Barnier told journalists. "We will need to propose further … methods in relation to the … public supervision of all reference rates and benchmarks."

The European Banking Federation, which oversees Euribor, said it backed public supervision as fast as possible.

‘Banksters’ no better than corrupt casino dealers

Barnier made his remarks as he outlined a proposal to criminally sanction traders and others involved in rigging an index such as Libor. New rules are not set to take effect until 2015.

Viviane Reding, the EU's justice commissioner, said such measures were just a first step in dealing with the misconduct of bankers, whom she described as “banksters” and compared to "corrupt casino dealers betting with their clients' savings".

"I was not very much convinced by the action of the Bank [of England]," she said, in frank remarks that Barnier declined to repeat. "It has already got, years before, a warning that things were going wrong. It has not acted. The Libor scandal reveals major faults in the governance of the process."

Reding suggested the European Central Bank could become the supervisor to "end this very cosy relationship that exists today between some national supervisors and banks," in remarks that are likely to anger those in Britain who wish to retain autonomy in policing finance.

"We need rigour, independence. We need it at the European level. We cannot continue with the casino mentality," Reding said.

Harsher punishments needed for rate-fixers

The Bank of England, which does not regulate the financial sector, says it was unaware of any fraudulent rigging of the rate, though officials acknowledged that banks had difficulties with their estimates for Libor submissions when the money markets froze in the 2008 financial meltdown.

"Should we head towards a systematic approach to the way in which these benchmarks are composed based on real facts and figures rather than estimates?" Barnier said.

The change to the EU-wide rules concerning market abuse means it would no longer be possible for countries to take a softer stance on such offences. Insider dealing is, for example, dealt with differently by countries such as Germany, Italy and Spain.

Barnier wants to leave it up to countries to decide what penalties they want for those found guilty of index rigging. By criminalising it, however, he gives them a free hand to impose harsher punishment.

“Public confidence has taken a nosedive with the latest scandals about serious manipulations of lending rates by banks. EU action is needed to put an end to criminal activity in the banking sector and criminal law can serve as a strong deterrent,” said Vice President Viviane Reding, the EU's commissioner for justice.

“This is why we are today proposing EU-wide rules to tackle this type of market abuse and close any regulatory loopholes. A swift agreement on these proposals will help restore much needed confidence of the public and investors in this crucial sector of the economy," Reding said.

“The international investigations under way into the manipulation of Libor have revealed yet another example of scandalous behaviour by the banks. I wanted to make sure that our legislative proposals on market abuse fully prohibit such outrages,” said Internal Market and Services Commissioner Michel Barnier.

Barnier added: “That is why I have discussed this with the European Parliament and acted quickly to amend our proposals, to ensure that manipulation of benchmarks is clearly illegal and is subject to criminal sanctions in all countries.”

“We strongly condemn any attempt at manipulation of benchmarks,” said Guido Ravoet, chief executive of Euribor-EBF. “We fully support the Commission’s move to make them clearly illegal and liable to criminal sanctions. It is important that the Commission seizes this opportunity to introduce a common understanding and sanctioning mechanism in the EU.”

“In parallel, to maintain the stability and reliability of Euribor, we support the introduction of public supervision in its  governance and we believe that, the sooner the supervisory framework is in place, the better”, added Ravoet.

"Manipulation of Libor and other similar benchmarks is a seismic event in financial markets, which affects the pricing of many other financial instruments. Not only do we need to ensure the strongest punishments for such market abuse, we will need to examine how benchmarks are produced and if possible move to a system based on actual transactions rather than estimates,” said British MEP Sharon Bowles (Alliance of Liberals and Democrats).

"There are competition aspects to this behaviour – like a cartel – and the full force of competition policy should be brought to bear. However, crippling fines on banks which have benefited from taxpayer’s money may be an oxymoron. The punishment should rather be the breaking up of big institutions, by which I mean beyond simply separating retail and investment banking,” said Bowles, who chairs the Parliament’s economic and monetary affairs committee.

A spokesperson from Which?, a consumer rights group in Britain said:

"Fines have clearly had little effect in stopping the corruption at the heart of our banking system. Unless individuals are held to account for their actions it's hard to see how the culture of banking can be changed once and for all."

"Eight in ten consumers told us they think individuals should be personally prosecuted if banks have broken the law. We have already called on the Government to change the rules to enable this and we look forward to seeing the conclusions of the Serious Fraud Office's investigation," the Which? spokesperson continued.

"But we also want the European Commission to investigate the impact that the LIBOR and EURIBOR rate-rigging scandal has had on European retail banking customers. If European consumers have been affected there should be a collective redress mechanism to compensate them," he added.

In response to the Libor rate-rigging scandal, the European Commission promised to revamp the EU's market abuse directive and regulation within weeks.

The scandal surrounding Libor – the London interbank lending rate – has rocked the City of London and has forced the resignation of UK bank Barclays’ chief executive Bob Diamond.

A review of market indices to judge if they should be brought under the watch of external regulators is also due to be carried out by the European Commission, and could also take several months.

A benchmark is any commercial index or published figure calculated by the application of a formula to the value of one or more underlying assets or prices, by reference to which the amount payable under a financial instrument is determined.

  • Autumn 2012: The European Parliament, Council and Commission will consider regulatory proposals.

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