Sooner or later, the global inquiry into the rigging of Libor will have to deal with a sticky issue: what to do with the British Bankers’ Association, the trade group that was supposed to guarantee the integrity of one of the world’s most important financial benchmarks.
Founded in 1919, the BBA exists primarily to lobby for the interests of its member banks. In the 1980s, it took on the added responsibility of overseeing the London interbank offered rate, which is supposed to provide an objective measure of banks’ borrowing costs. Calculated every workday morning, Libor is used to determine payments on at least $300 trillion in mortgages, corporate loans and derivative contracts worldwide.
If the BBA had set out to design a system that its members could manipulate, it couldn’t have done a much better job. Instead of using the interest rates from actual transactions, the association relies on banks to report their borrowing costs. The chairmen of the committees that are supposed to oversee Libor, investigate misbehavior and impose sanctions are all from contributing institutions. Absurdly, the BBA won’t say whether the committees have ever taken any enforcement actions, and keeps secret the names of all the committee members. That amounts to letting the banks act as police, judge and jury in a Star Chamber.