In the wake of the Libor rigging scandal, in which Barclays were charged and several other banks are under investigation for purposefully altering estimates to control the inter-bank rate, the FSA has decided to review how Libor is run and suggest any reforms that they feel necessary.
It is expected that one of these reforms will be the change in responsibility for the BBA to collate and publish the data that affects the inter-bank rate. The BBA released a statement saying that: "If Mr Wheatley's recommendations include a change of responsibility for Libor, the BBA will support that."
In the current working of Libor, banks submit estimated rates at which they would loan each other money, in particular the percentage of interest on dollars over a 3-month period. The estimates are then used to calculate the standard rate for inter-bank exchanges.
This is a reflection on the financial health of different banks, the benchmark for interest rates on mortgages, loans and other lending.
It was discovered that, for several years, senior Barclays employees were purposefully driving down the Libor rates, which resulted in large losses for savers and investors. Other banks are being investigated currently on the same charges of manipulation.
This scandal compounded several months of other humiliations for the banking industry, including the miss-selling of payment protection insurance and the miss-selling of specialist insurance (interest rate swaps) for small businesses.
Just what the reform ideas will be remains to be seen until the report is published (expected on Friday) and how quickly it can be implemented may affect how well the reform is received. It is speculated that Libor rates will be calculated based on actual market information, instead of bank estimates. One thing is for sure, these recent scandals have sunk trust in the banking industry even further and something has to be done about it.
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