British Parliament Questions Bank Of England About Its Role In Libor Scandal

Officials from England's central bank are being grilled about their role in the Libor scandal that has been made public by penalties assessed against Barclays  manipulating the Libor. They are certainly being more aggressive in their questioning of central bank officials than the US Congress has been over its regulation of JP Morgan after it reported multibillion dollar loses on a trade. The US Congress questions the JP Morgan CEO over the trade and just fell short of asking if they should kiss his ring.

Barclays could not have manipulated the Libor by itself.  The rate is set by using rates submitted by 20 major global banks.  Several US banks must have been involved but it has attracted little attention in the US. Perhaps that is because few people understand what the Libor is, and why it is important.  It is the rate that banks charge when they borrow from each other to meet liquidity needs.  It appears that banks reported lower rates than they actually charged each other during the banking crisis. If banks demanded higher rates from each other it might have raised questions about increased risk in the banking system. If central banks were aware of this practice, and it appears that they were, they encouraged the practice rather than taking early actions to deal with rising risk in the banking system.  The Libor is also important to consumers and to business. A wide variety of loans are set in relation to Libor.  It also affects the value of derivatives that are traded in the $700 trillion derivatives market.  Banks that have information about the direction of Libor have an advantage over their counterparties when making trades.  Trades who are less informed would be making bets in a Casino in which the House had loaded the dice.

Among other things, the Libor scandal has raised further questions about the integrity of the global banking system and also about the central banks that are supposed to protect the integrity of the system.  It appears that the regulators are too close to those that are they are supposed to be regulating.