The Federal Reserve Bank of New York may have known as early as August, 2007, that the setting of global benchmark interest rates was flawed. Following an inquiry with British banking group Barclays PLC in the spring of 2008, it shared proposals for reform of the system with British authorities.
The role of the Fed is likely to raise questions about whether it and other authorities took enough action to address concerns they had about the way Libor rates were set, or whether their struggle to keep the banking system afloat through the financial crisis meant the issue took a backseat.
A New York Fed spokesperson said in a statement that “in the context of our market monitoring following the onset of the financial crisis in late 2007, involving thousands of calls and e-mails with market participants over a period of many months, we received occasional anecdotal reports from Barclays of problems with Libor.
“In the Spring of 2008, following the failure of Bear Stearns and shortly before the first media report on the subject, we made further inquiry of Barclays as to how Libor submissions were being conducted. We subsequently shared our analysis and suggestions for reform of Libor with the relevant authorities in the UK.”
The Fed statement did not provide the precise timing of the communication with the British authorities. Bear Stearns collapsed in early March 2008 and was then acquired by JPMorgan.
Barclays last month agreed to pay $453-million to British and U.S. authorities to settle allegations that it manipulated Libor, a series of rates set daily by a group of international banks in London across various currencies.
The rates are an integral part of the world financial system and have an impact on borrowing costs for many people and companies as they are used to price some $550-trillion in loans, securities and derivatives.
By manipulating Libor, banks could have made profits or avoided losses by wagering on the direction of interest rates. During the enormous liquidity problems in the financial crisis they could, by reporting lower than actual borrowing costs, have signalled that they were in better financial health than they really were.
So far, the scandal has been more of a British affair, prompting the resignation of Barclays top three executives, condemnation from the British government amid a public outcry, and questions about the lack of oversight from British regulators.
The Bank of England’s Deputy Governor Paul Tucker on Monday even had to deny suggestions that government ministers had pressured him to encourage banks to manipulate Libor.
But the deepening investigation by regulators in Britain, the United States, and other countries is expected to uncover problems well beyond Barclays and British banks.
More than a dozen banks are being investigated for their roles in setting Libor, including Citigroup, JPMorgan Chase & Co., Deutsche Bank, HSBC Holdings PLC, UBS and Royal Bank of Scotland..
Regulators, including the New York Fed, had a responsibility “to force greater integrity and cooperation,” and it had clearly reviewed the situation and had the resources to investigate, said Andrew Verstein, an associate research scholar at Yale University, who has written about Libor. “Obviously they considered this to be within their orbit.”
Many of the requests for improper Libor submissions came from traders in New York.
As one of the world’s most powerful regulators, the New York Fed has the power to “jawbone” banks to force them to make tough decisions, said Oliver Ireland, former associate general counsel at the Federal Reserve in Washington and now a lawyer at Washington law firm Morrison & Foerster.
Still, he said by the autumn of 2008, the New York Fed’s focus was locked on the impact of the meltdown of Lehman Brothers and AIG as it sought to prevent a global economic disaster.
Barclays said in documents released last Tuesday that it first contacted Fed officials to discuss Libor on Aug. 28, 2007, at a time when credit problems arising from the U.S. housing bust were beginning to mount. It communicated with the Fed twice that day.
Between then and October, 2008, it communicated another 10 times with the U.S. central bank about Libor submissions, including Libor-related problems during the financial crisis, according to the documents.
In its document listing those meetings as well as ones with British authorities, Barclays said: “We believe that this chronology shows clearly that our people repeatedly raised with regulators concerns arising from the impact of the credit crisis on LIBOR setting over an extended period.”