- July 3, 2012 Eric Johnston
THE Australian body overseeing the setting of a key banking price gauge has insisted the local benchmark remains sound, even as six of the banks that provide a crucial stream of figures used to decide pricing are under investigation in Britain for manipulating a similar index.
Britain’s growing interbank interest-rate scandal last night scored its biggest scalp yet as the chairman of London-based investment bank Barclays resigned amid fallout from his bank’s involvement in the manipulation of a key finance benchmark.
But the resignation of Marcus Agius failed to diffuse political calls for Barclays’ chief executive, Bob Diamond, to also quit in the wake of Barclays being hit with a record £290 million ($A440 million) fine.
After a wave of political fury was unleashed at Barclays for its attempt to manipulate key interest rates, Mr Agius resigned after acknowledging he was the ”ultimate guardian of the bank’s reputation”.
These are two benchmarks that form the basis for pricing an array of financial products, potentially affecting the price at which households and businesses borrow money.
The Australian equivalent, the bank bill swap rate (BBSW), which provides a benchmark for Australian-dollar debt, is calculated daily through a panel of 14 banks submitting pricing data.
The industry body that oversees the BBSW remains confident the Australian benchmark is an accurate reflection of pricing, despite evidence of rate rigging overseas.
”The BBSW is fundamentally sound as a benchmark because the rates that we compile reflect the prices that are actually traded on a homogenous market,” said David Lynch, executive director of the Australian Financial Markets Association.
Traders with experience in both markets said the key difference between British and Australian benchmarks was the definition used to determine pricing. In Australia pricing is calculated on billions of dollars worth of trading in bank-bill paper.
In contrast, Libor rate contributions are based on an assessment of funding costs of any single bank. In Australia, banks are asked at what rate they believe they could borrow funds on money markets rather than actual trades.
Still, among the banking panel that provides BBSW pricing information, six have so far come under investigation by British authorities in relation to the Libor scandal. They include UK lenders Lloyds, HSBC and Royal Bank of Scotland. Each bank has said it was assisting Britain’s Financial Services Authority with its inquiries. RBS has also suspended four traders.
Mr Lynch declined to comment on the performance of specific banks, but said the ”quality of BBSW rate contributions has been consistently high, with few outlying rates reported”.
Any figures that are out of line with the broader market ”get eliminated” though the rate-trimming process, he said.
Barclays, which has also suspended 14 traders following the rate-fixing probe, is not a member of the BBSW panel.
From 2005, Barclays traders were found to have tried to alter rates to help themselves and rival traders. In 2008 – when Barclays raised concerns about Libor – the bank is said to have kept rates lower because higher levels might have been misinterpreted as suggesting it was facing financial difficulties.