OTTAWA Central bankers and regulators will hold talks in September on whether the troubled global Libor interest rate can be reformed or whether it is so damaged that the benchmark of borrowing costs should be scrapped.
Bank of England Governor Mervyn King told fellow central bankers in a letter that it was "very clear that radical reforms of the Libor system are needed".
Fed Chairman Ben Bernanke and global financial regulator Mark Carney, who is also governor of the Bank of Canada, on Wednesday floated possible alternatives to the London interbank offered rate, which some bankers manipulated in the 2007-09 financial crisis.
"There are different alternatives if Libor cannot be fixed," Carney told a news conference in Ottawa.
"If it's structurally flawed and can't be fixed -- which is a possibility -- there may need to be different types of approaches, and we need to think that through."
King put the Libor issue on the agenda of the Economic Consultative Committee of global central bankers that will meet in Basel, Switzerland, on September 9, a central bank source said.
The discussions will continue there the following week at the Financial Stability Board's steering committee, which is chaired by Carney and which also includes financial regulators.
Libor is used for $550 trillion of interest rate derivatives contracts and influences a wide array of financial products from mortgages to credit cards, and Carney said it was crucial that markets be able to have "absolute confidence" in it.
Dozens of banks, including JPMorgan Chase & Co (JPM.N) and Deutsche Bank (DBKGn.DE), are under investigation in the rate-rigging scandal, where banks low-balled the rate to profit on trades and hide their own borrowing costs during the 2007-09 financial crisis.
Barclays Plc (BARC.L) has already settled with U.S. and UK regulators, paying a $453 million penalty.
Goldman Sachs (GS.N) Chief Executive Lloyd Blankfein said in Washington that the Libor scandal only built on the American public's mistrust of the industry after the 2007-2009 financial crisis.
"There was this huge hole to dig out of in terms of getting the trust back, and now it's just that much deeper," Blankfein said.
Carney discussed with Bernanke, King and others "the merits of a coordinated global initiative to quickly and effectively restore the integrity of this vital process," Carney spokesman Jeremy Harrison said.
"There is an attraction to moving to obviously more market-based rates if possible," Carney said in his news conference.
Carney mentioned the possibility of using repo rates and Overnight Index Swap rates, two ideas also mentioned on Wednesday by U.S. Federal Reserve Chairman Ben Bernanke in Washington.
Bernanke also singled out Treasury Bill rates as a potential benchmark, but said the Fed had not come out in favour of a specific alternative.
Libor is calculated daily in London for the U.S. dollar and other currencies when panels of banks submit estimates of how much it costs them to borrow from each other.
It is thus a subjective call, as opposed to basing benchmarks more objectively so less manipulation is possible. The Australian Bank Bill Swaps Reference Rates, for example, are based on where paper is actually traded on the market.
Carney highlighted the Canadian Dealer Offered Rate because it is a committed rate: "It's actually a borrowing rate that is used by banks on a regular basis, almost daily basis when they take down syndicated BAs (banker acceptances)."
"So we may end up, we may -- I don't want to prescribe, it's very early days -- but we may end up with different types of rates used in different currencies," he said.
It is not a foregone conclusion that Libor will be abandoned, even if membership on Libor panels is voluntary.
Asked what would happen if banks pulled out, Carney said: "The best institutions recognize that they have a responsibility to remain in these panels and continue to post their estimates of where they can borrow."
He added: "To continue to do so ... isn't asking much."
He said most banks have posted figures accurately and "we should be a little careful not to tar all institutions in the panel with the actions of some." But wrongdoers "need to substantially raise their game" to levels of conduct expected in any other aspect of life.
U.S. Treasury Secretary Timothy Geithner was forced to defend himself on Wednesday against criticisms that regulators should have taken bigger steps to address concerns over Libor.
In June 2008, Geithner, then head of the New York Federal Reserve, sent an email to Bank of England's King, recommending six ways to enhance the credibility of Libor after Barclays had flagged concerns as early as 2007.
"The U.S., to its credit, set in motion at that stage a very, very powerful enforcement response, the first results of which we have now seen," he said in New York.
(Editing by Janet Guttsman and Tim Dobbyn)