WASHINGTON — Ben Bernanke had the back of the Federal Reserve Bank of New York on Tuesday.
Testifying before the Senate Banking Committee about the Libor scandal, the Federal Reserve Board chief said the New York Fed took the appropriate steps to inform the relevant authorities when it suspected traders of manipulating the important benchmark rate.
“The Federal Reserve Bank of New York, after receiving information from its market inquiries responded very quickly,” Bernanke said. “It set up an internal working group to address the issue. Importantly, it informed all the relevant authorities in both the U.K. and the United States.”
The New York Fed, which is responsible for gathering market intelligence for the entire Fed system, offered a list of possible fixes to structural problems with the London interbank offered rate, but British authorities adopted only a small part of them, Bernanke said.
Actions by the New York Fed, whose president at the time was Timothy Geithner, set off a chain of events that led to a “rapid follow-up” by the responsible agencies, Bernanke said. Geithner has been the Treasury secretary since January 2009.
The Commodity Futures Trading Commission began inquiries as early as April 2008 and sent requests for information to U.S. banks in the fall of that same year. The Securities and Exchange Commission and the Department of Justice began probes in 2009 and 2010, respectively, Bernanke said.
The Libor-related scandal at Barclays overshadowed monetary policy at the hearing Tuesday, where the chairman delivered his semiannual report to Congress.
“I would like to see additional reforms to the Libor process, assuming that Libor will continue to be a benchmark for financial contracts,” Bernanke said.
Recent reports about traders’ actions were “very troubling” and undermine the public’s confidence in financial markets, Bernanke said. “It’s a major problem for our financial system … and we need to address it,” Bernanke said.
A Barclays trader told a junior Fed employee in a phone call on April 11, 2008, that he thought Barclays was underreporting its rate to avoid looking weak during the period of the financial crisis, Bernanke said. Transcripts of the phone calls, released Friday at the behest of lawmakers, made no reference to the manipulation of rates for profits by derivatives traders as had been alleged recently, he said.
Complicating matters even further, he said, was the fact that there were fewer of most types of transactions during the height of the crisis other than overnight ones. Banks were being asked to report what they would pay if they were borrowing at a certain term, and it may have been the case that transactions were not taking place at the term.
Still, he said, recent events made clear that the “Libor system is structurally flawed.”
Bernanke briefly discussed several alternatives under consideration, like repo rates or the overnight index swap rate or other types of interest rates, which have the advantage of being market rates as opposed to simply reported rates as is the case with Libor.
It is still unclear whether U.S. banks were guilty of the same manipulation, Bernanke said. The continuing investigation by U.S. regulators is “robust,” he said.
Two U.S. banks have disclosed in filings with the SEC that they are providing information to the agencies investigating the matter.