The European Commission has described the manipulation of inter-bank lending rates such as Libor as "a scam" and announced plans for criminal sanctions to prevent a repeat of the scandal.
Commission vice-president Viviane Reding said that rate rigging was "another example of irresponsible banking practices undermining investor confidence and market integrity". The controversy erupted in the United Kingdom when Barclays was fined £290m and chief executive Bob Diamond forced to resign after the bank admitted that it had submitted false rates between 2005 and 2009. International investigations into 15 other banks are ongoing.
"Keeping Libor artificially high or unusually low is a scam," Reding told a press conference in Brussels today, adding that market abuse was "not a victimless offence". She said: "Homeowners, small businesses and students may have paid higher interest rates because of the activity of certain bankers."
The European Union executive has adopted amendments to its proposed regulation and directive on insider dealing and market manipulation, to explicitly make the rigging of benchmark rates including Libor and its eurozone equivalent Euribor a criminal offence. "All member states will have to make sure that manipulating the calculation of a benchmark is clearly inscribed in their national criminal codes and punished with effective sanctions," said Reding, who also suggested that public authorities should have a greater monitoring role.
Internal market and services commissioner Michel Barnier described the behaviour of some banks as "scandalous" and said "such outrages" should be prohibited. However, before coming into force the commission's proposals will need the support of EU governments and the European Parliament.
The market benchmark rates for inter-bank lending are set by asking banks each day to estimate how much it would cost to borrow from each other. Sharon Bowles MEP, chairwoman of the parliament's economic and monetary affairs committee, called for the rates to be based on actual transactions rather than estimates.
She also said banks had become "too big to supervise" – but warned against imposing crippling fines on banks that in many cases have benefited from taxpayers' money. Nevertheless she said the "full force of competition policy should be brought to bear" and big banks broken up into separate retail and investment sections.
In an article for PublicServiceEurope.com
this week, Arlene McCarthy MEP, also a member of the parliament's economic and monetary affairs committee, wrote that the scandal was "market manipulation of the worst kind". She said: "Fines have proved ineffective and have not changed the culture in the banking industry. We must therefore look to criminal sanctions as a penalty and deterrent for this rogue behaviour."
In relation to Barclays, commission vice-president Reding today questioned the Bank of England's failure to act more quickly. "I was not convinced by the action of the Bank of England, as the competent banking supervisory authority, in this case," she said. "I would have expected to see greater energy in reacting to calls – some made already over four years ago – for the elimination of incentives to misreporting. This did not happen."
Meanwhile she added that because the benchmark rates had an impact around the world, it was important to "Europeanise" the supervision of banking. She said the European Central Bank acting as a single supervisory body in the eurozone – as planned by EU leaders – would "end the often too 'cosy' relationship that exists today between national supervisors and banks in their home country". She said banks should "no longer be able to behave like casinos. They should instead get Europe working again."