Reserve Bank joins global review on rate rigging
The Swiss-based Financial Stability Board has set up a steering group of central banks and global regulators to examine ways in which key interest rate benchmarks - used by banks to lend money to each other - are set by banks in financial markets.
Steering group members include representatives from the RBA, the US Federal Reserve, the Bank of England, the European Central Bank and the Bank of Japan.
The RBA's assistant governor Guy Debelle represents Australia.
A smaller taskforce of mostly private-sector banks has also been established to see if benchmarks are still fit for purpose.
Australia's representative on that taskforce is NAB's John Feeney, who is head of rates and credit at the bank's wholesale arm.
Rate-rigging scandals have rocked global money markets in the past year, with trillions of dollars in loans affected between banks and their customers.
Barclays, UBS and the Royal Bank of Scotland have been hit with fines totalling $2.5 billion for manipulating the London interbank offered rate, called Libor.
In June, Singapore's bank regulator censured 20 banks, including ANZ and Macquarie Bank, for trying to manipulate the country's interbank offered rate, called Sibor.
Australia's bank bill swap rate, the local equivalent of Libor, has already been affected by the fallout.
Earlier this year, global investment banks with Australian satellites - such as Citigroup and HSBC - pulled out of the panel that sets the BBSW, forcing the Australian Financial Markets Association to change the way it is set.
In March, the AFMA confirmed the BBSW would no longer be set manually by a panel of bank representatives but would be set automatically using electronic data drawn from financial markets.
The two systems are running in parallel at the moment but, if things go well, AFMA intends to switch completely to the new electronic system by the end of next month.
The BBSW is the benchmark rate at which banks lend to each other. It is used to calculate rates that affect hundreds of billions of loans, from mortgages to business loans.
The FSB said on Friday that measures proposed by national regulators, international standard setting bodies and central banks to restore oversight processes of benchmark rates "need to implemented with high priority and urgency".
It will focus on interest rate benchmarks that are considered to play the most fundamental role in the global financial system.
The small taskforce - to be called the Market Participants Group - has been asked to submit a report that proposes options for "robust" reference interest rates that may serve as potential alternatives to existing Libor, Euribor (Europe), and Tibor (Tokyo) benchmark rates.
Frequently Asked Questions about this Article…
The Reserve Bank of Australia (RBA) has joined a high-level steering group set up by the Financial Stability Board (FSB) to review bank-to-bank lending practices after recent rate-rigging scandals. The steering group includes major central banks and regulators such as the US Federal Reserve, Bank of England, European Central Bank and Bank of Japan, and will examine how key interest rate benchmarks are set.
Interest rate benchmarks — examples include Libor, Sibor and Australia’s BBSW — are reference rates banks use when lending to each other. Those benchmarks feed into loan and mortgage pricing, so changes or manipulation can affect the interest rates everyday investors and borrowers pay on mortgages, business loans and other credit products.
Rate-rigging scandals have had wide-reaching effects: regulators found manipulation in key benchmarks, with fines imposed on banks such as Barclays, UBS and the Royal Bank of Scotland totalling about $2.5 billion for Libor manipulation. In Singapore, 20 banks — including ANZ and Macquarie — were censured over attempts to influence Sibor. The fallout has affected trillions of dollars of loans between banks and customers.
The Australian Financial Markets Association (AFMA) has moved away from manually setting the BBSW by a panel of bank representatives and switched to an automatic method using electronic market data. The two systems are currently running in parallel, and AFMA intends to move completely to the electronic system by the end of next month if things go well.
Australia’s representative on the FSB steering group is the RBA’s assistant governor Guy Debelle. On the smaller mostly private-sector taskforce — called the Market Participants Group — Australia is represented by John Feeney, head of rates and credit at NAB’s wholesale arm.
The Market Participants Group is a smaller taskforce of mostly private-sector banks asked to propose options for 'robust' reference interest rates. Its work focuses on identifying potential alternatives to existing benchmarks such as Libor, Euribor and Tibor, and submitting a report with recommended options.
Yes. Because benchmarks like the BBSW are used to calculate rates on hundreds of billions of loans — including mortgages and business loans — reforms to how those benchmarks are set or replaced could influence loan pricing. The goal of reform is to restore oversight and make benchmarks more reliable.
Everyday investors should watch for regulator and industry actions recommended by the FSB and the Market Participants Group, AFMA’s full switch to the electronic BBSW system (planned by the end of next month), and any announcements about alternative reference rates. Those developments will shape how benchmark rates are set and could affect loan and mortgage pricing.