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Jun 7, 2013 | 10:17 GMT

EU: A Bid to Take Libor Oversight from the U.K.

EU: A Bid to Take Libor Oversight from the U.K.   Read more: EU: A Bid to Take Libor Oversight from the U.K.
(GERARD CERLES/AFP/Getty Images)
Summary

London and Brussels are headed for a new political clash after British media revealed a European Commission plan to take supervision of the Libor, a key benchmark for interest rates around the world, away from the United Kingdom. EU Markets Commissioner Michel Barnier confirmed that the Commission would propose legislation to this effect within a few months. The move is part of EU efforts to bring transparency to European financial markets. London will challenge the proposal, which probably will not enter force in the short term. The debate ultimately highlights the tensions between national sovereignty and regional integration that are a key feature of the European Union.

The Libor, short for the London Interbank Offered Rate, is an average interest rate at which banks can borrow funds from other banks on the London market. It is widely used around the world as a reference to price various financial products, from futures contracts to mortgages. Banks in the eurozone compile a similar benchmark known as Euribor.

Libor, which has existed since 1984, recently became embroiled in several scandals after media reports emerged regarding fraud and collusion by banks that participate in the system. According to media reports published in 2008, some banks understated borrowing costs so they could appear healthier than they were during the early stages of the international financial crisis. More recent British media reports suggest that manipulation of Libor dates back to 1991. In response to the scandal, the British Bankers' Association announced in September 2012 that it would transfer oversight of Libor to British regulators. In April 2013, the British government created the Financial Conduct Authority, a quasi-governmental agency to regulate the conduct of financial firms.

Despite London's efforts to enhance supervision of Libor, the EU Commission wants more oversight. According to a draft proposal leaked to the Financial Times, oversight of Libor, Euribor and other pricing benchmarks for an array of markets, including oil and gold, would be handed to the Paris-based European Securities and Markets Authority, suggesting the Commission does not fully trust British regulators.

The EU Commission is also trying to increase its oversight of benchmark pricing of commodities. In May, officers from the EU Commission carried out inspections at several oil companies in the United Kingdom, the Netherlands and Norway to investigate claims that they may have reported distorted prices to manipulate the published prices for some oil and biofuel products. Royal Dutch/Shell, Statoil, BP and energy price reporting agency Platts confirmed that they are under investigation.

The proposal remains in its earliest stage, having yet to be discussed within the EU Commission. If approved there, the 27 EU members would then vote on it, with passage requiring a qualified majority. This means that a majority of both countries and weighted votes — EU members are given different weight depending upon the size of their population and economy — would be necessary for passage. The measure would also be sent to the European Parliament for approval.

This lengthy process will give London time to try to build support against the project, or at least to propose changes to make it more palatable to the United Kingdom. Britain could also challenge the proposal at the European Court of Justice, something it has done regarding the EU financial transaction tax.

Assuming it did pass, the new oversight mechanism could face enforcement problems. It also probably could not succeed without collaboration from existing British regulatory institutions.

The Commission's plan comes as European countries are trying to create more transparency in financial markets. The finance ministers of Germany, France, the United Kingdom, Italy and Spain sent a letter to the EU Commission on April 9 proposing an information exchange system to fight tax evasion. A few weeks later, British Prime Minister David Cameron asked crown dependencies and overseas territories (including Bermuda, the British Virgin Islands and the Cayman Islands) to improve their tax information exchange systems. Tax evasion will be a topic at the G-8 summit from June 17 to June 18 in Northern Ireland.

Recent efforts to reform the European financial sector put London in an awkward situation. The United Kingdom opposed the financial transaction tax because it affects British interests. It also opposes Brussels' recent attempts to cap bank bonuses. At the same time, London supports an EU-wide fight against tax havens. In all these issues, Britain must find a balance between the strategic need to protect its powerful financial sector and the government's political need to bring transparency to the financial sector, which British voters consider partly responsible for the crisis.

There is an additional dilemma for the United Kingdom. London has promised to hold a referendum on British membership in the European Union. While London understands that it must be an EU member if it wants to challenge, block or modify EU policy, London fears it is steadily losing sovereignty to Brussels. It therefore wants to change the terms of its EU membership without departing the union, which would leave it even more isolated in Europe than it already is.

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