LONDON - British authorities are set to announce significant changes to the interest rate at the heart of a recent manipulation scandal as they aim to improve the accuracy and reliability of the benchmark.
On Friday, Martin Wheatley, the managing director of Britain's Financial Services Authority, will outline plans to increase oversight of the rate-setting process, which underpins more than $350 trillion of financial products like mortgages and student loans.
As part of that effort, regulators are stripping the British banking group that currently oversees the interest rate - the London interbank offered rate, or Libor - of its power. The British government, in turn, will take a more hands-on role, including making rate manipulation a criminal offense.
The benchmark itself will also be retooled to address some of its inherent weaknesses. The goal is to base Libor, which measures the rate at which banks lend to each other, on actual market transactions, r ather than estimates.
“The disturbing events we have uncovered in the manipulation of Libor have severely damaged our confidence and our trust,†Mr. Wheatley says in an advance text of the remarks he is to deliver in London. “It has torn the very fabric that our financial system is built on.â€
The scrutiny of Libor has intensified this year as authorities around the globe have ramped up their investigation into rate-rigging at more than a dozen big banks. Regulators are concerned that the institutions, including HSBC, Deutsche Bank and JPMorgan Chase, submitted false rates.
In June, the British bank Barclays agreed to pay $450 million to settle charges that employees manipulated the rate to increase profits and make the institution appear healthier. Several top officials, including the chief executive, Robert E. Diamond Jr., resigned as a result of the scandal.
“Libor needs to reflect the values of the market,†said David E. Kovel, a partne r at the law firm Kirby McInerney who is representing clients in a potential class-action suit related to Libor. “There's no doubt the way that the rate is set up now makes it susceptible to abuse.â€
The changes to Libor, some of which may require changes to British law, are expected to be introduced over the next 12 months.
The Financial Conduct Authority, a new British regulator that will become part of the Bank of England, the country's central bank, will have primary responsibility for regulating Libor. Mr. Wheatley of the Financial Services Authority will lead the new agency when it is created next year.
“We can't allow the unfettered latitude that banks previously enjoyed,†Mr. Wheatley's advance text says. “Much greater rigor and transparency must be introduced.â€
Under the proposal, regulators will pare back the number of currencies and maturities included in the Libor system. Critics have questioned the accuracy of Libor, given the lack of actual bank lending transactions, particularly in smaller currencies like the Swedish krona.
To improve the system, five of the current 10 currencies, including the Canadian dollar, will be phased out over the next year. Instead, Libor will focus mainly on major currencies like the United States dollar and the euro. In all, regulators are looking to cut the number of Libor rates to 20, from 150.
Individual banks' rate submissions will be delayed by three months, rather than released in real time. This change means Libor will not readily reflect a bank's health, potentially eliminating a motivation to submit false rates.
If a bank reports a high rate, it can be a sign of underlying troubles at the firm. During the financial crisis, Barclays submitted artificially low rates to deflect concerns about its financial position, according to regulatory documents.
Despite the changes, analysts worry that Libor may still be easy to manipulate. Since the financial crisis, banks have not been willing to take the risk of lending to other institutions. In their proposal, regulators indicate that the process will still rely on some “level of judgment†when hard data are not available.
“There are few markets where there's a significant amount of liquidity,†said Darrell Duffie, a finance professor at Stanford University. “It makes sense to prune down the number of maturities.â€
The British government will also replace the British Bankers' Association, the London-based trade group, as Libor's overseer. The organization, which established the benchmark rate in 1986, has come under mounting criticism for failing to catch the manipulation, which dated back to at least 2007, according to regulatory filings.
Under the proposed changes, a new administrator will be selected in the next 12 months. The future role of the data provider Thomson Reuters, which currently collects the daily rate submissions on beha lf of the trade association, is uncertain.
“British Bankers' Association clearly failed to properly oversee the Libor setting process and should take no further role in the administration and governance of Libor,†Mr. Wheatley's advance text says.
He will also take aim at the excesses within the financial services sector that led to the manipulation of Libor, arguing that traders at many of the world's largest banks were too focused on securing large bonuses. “Libor needs to get back to doing what it is supposed to do,†the text says, “rather than what unscrupulous traders and individuals in banks wanted it to do.â€
