Thursday, December 06, 2012

Treasury Responds to Grassley-Kirk Letter on LIBOR Concerns

In a response letter to Senators Charles Grassley and Mark Kirk, a US Treasury official said that in reaction to concerns around the LIBOR benchmark in 2008, the NY Fed took a number of actions, raising the issue with key US regulators responsible for market manipulation and abuse and also with the Bank of England, as well as pushing for reforms to the LIBOR process. FRBNY President Tim Geithner personally raised the issue with the President’s Working Group on Financial Markets in a meeting with CFTC and SEC leaders, among others.

President Geithner also sent Mervyn King, Governor of the Bank of England, a memorandum with specific recommendations to address the problem and the central bank pledged to act on the problem. NY Fed staff followed up with UK authorities in the following weeks and months. The response letter was signed by Alastair Fitzpayne, Assistant Secretary for Legislative Affairs.

Senators Grassley and Kirk had asked Treasury Secretary Tim Geithner to explain his apparent inaction to stem the dominance of the LIBOR benchmark and inform the public of LIBOR, which the Senators described as a rigged interest rate that affects interest rates on mortgages, student loans, credit cards and other loans. Pending an acceptable response from Treasury, the Senators put a hold on the nomination of Richard Berner to head the Dodd-Frank created Office of Financial Research, which is housed within Treasury.

The London interbank offered rate, or LIBOR, is the average interest rate that banks use to borrow from each other.  Set in London, the rate is one of the main rates that determine the cost of interest for trillions of dollars of loans on a variety of everyday consumer loans such as mortgages and more complicated financial instruments such as derivatives.

Senators Grassley and Kirk also emphasized that, in the wake of the LIBOR scandal, it is essential to undertake steps to consider the creation of a US-based interest rate index. If U.S. investors and borrowers have suffered financial harm from dependence on an index set in London, they have the right to expect the country’s leaders to support better alternatives. Complacency in the wake of losses and lawsuits will diminish both investor and borrower confidence regarding debt securities issued in U.S. financial markets, said the Senators.

In response, Treasury noted that a broad global effort is underway to consider reforms to LIBOR and to explore potential alternatives. In the US, the Financial Stability Oversight Council and the SEC, CFTC and Fed are in the process of considering how best to address the potential implications of this issue for the financial system. In particular, they are assessing actions that could be taken to address the vulnerabilities of LIBOR, examining the strengths and weaknesses of other survey based measures, evaluating alternative benchmarks, and assessing the potential financial impact of a transition to a new benchmark. 

Senator Grassley said that the Treasury’s response was incomplete and that he and Senator Kirk still await a complete answer detailing the actions treasury did or did not take and whether the Secretary would maintain public silence if he became aware of interest rate manipulation in the future. Pending receipt if such an answer, said Senator Grassley, the hold on the Berner nomination stands.



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