Euribor cuts Libor adrift in scandal storm

Brussels-based interest rate index Euribor has distanced itself from its beleaguered London counterpart Libor, saying it could not have been rigged like its British equivalent, EURACTIV can reveal.

Both inter-bank interest rate setters are subject to an antitrust investigation by the European Commission to examine whether there was collusion amongst member banks in an attempt to rig rates.

Barclays Bank was fined €373 million last month in separate UK proceedings after admitting that it attempted to manipulate the Libor and Euribor rates between 2005 and 2009.

The European Commission warned yesterday (25 July) that the EU could take over supervision of benchmarks such as Libor as it launched new market rules to clamp down on rate-fixing.

Begging to differ

But officials at the European Banking Federation (EBF), the body responsible for administering Euribor, have distanced themselves from the beleaguered Libor, saying that the composition of its bank panel (see background) make it structurally impossible that a cartel could have successfully colluded to fix the index.

Cédric Quéméner a director of Euribor-EBF, told EURACTIV: “How many banks are under investigation? The number is around 18, of which only nine or so are also members of Euribor, meaning that the critical number required to possibly manipulate the [Euribor] rate is not reached.”

“If they did try to manipulate [Euribor] and did not succeed, it would be because of governance and the size of the panel,” Quéméner added.

EURACTIV understands that Euribor also believes that the constitution of its larger panel of banks precludes collusion.

“It seems that the banks under investigation are investment banks, whereas the Euribor panel banks include Landesbanken, Greek banks, co-operative banks and some investment banks from different countries, with different strategies,” an industry source explained, speaking on condition of anonymity.

“If these banks were to convince each other that they want the same rate level, they would need to find at least another 15 different banks with the same interest as their own,” the source added.

A spokesman for the Commission said that the suggestion that Euribor was structurally incapable of being rigged was “pure speculation”.

Euribor’s attempt to distance itself from Libor follows a perception amongst European bankers that the scandal will impact the future of the industry in the City of London.

Heat from the US on City of London

“In future the banking community will have to offer what is known as 'a boring job', selling credit that they can genuinely guarantee, and I hope that this tangle will help give the banking industry a change,” the industry source said, adding: “The City of London’s way of banking is in an extremely difficult position and this is the legacy of the Libor story.”

The City, London's financial district, is also feeling the heat from EU and US regulators in the wake of the scandal.

EU Justice Commissioner Viviane Reding yesterday rapped the UK central bank for its failure to act on Libor despite warnings. Last week US Federal Reserve Chairman Ben Bernanke described the Libor system as “structurally flawed”, saying an international effort is needed to fix the problem.

A US government source told EURACTIV on condition of anonymity that Washington was piqued by a perception that London was attempting to spread the Libor scandal further afield “as a diversionary tactic”.

Of divisions between Euribor and Libor, the industry source said: “When you are in the same boat with similar people and the weather is fine, no one seems as pleasant as your sailing companions, but when a tempest blows up you would do anything to survive.”

"I was not very much convinced by the action of the Bank [of England]," said EU Justice Commissioner Viviane Reding. "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."

In relation to the Libor scandal, the EU's Internal Market Commissioner Michel Barnier yesterday said: “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?"

The City of London-based British Bankers’ Association (BBA) surveys a panel of 18 major global banks for the London Interbank Offered Rate (Libor) asking the panel banks at what rate they could borrow funds each day. The BBA throws out the highest and lowest four responses, and averages the remaining ten.

The European Banking Federation bases the Euro Interbank Offered Rate (Euribor) on the average at which its panel of 43 banks offer to lend unsecured funds to other banks in the wholesale money market. The highest and lowest 15% of quotes are eliminated, with the remainder are averaged. The collusion of more than 15 banks would be required to sway the Euribor index.

At least 15 financial institutions are still under investigation in the US, UK and Asia in connection with rate-fixing: Bank of Tokyo-Mitsubishi UFJ, Citigroup, Credit Suisse, Deutsche Bank, HSBC, ICAP, JP Morgan Chase, Lloyds Banking Group, Mizuho Financial Group, Rabobank, Royal Bank of Scotland, RP Martin Holdings, Sociéte Générale, Sumitomo Mitsui Banking and UBS.

  • 2013: The Commission's antitrust investigation is unlikely to be completed before the end of 2012, with results expected in 2013.

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