Recommendations

On the basis of the review findings, the EBA and ESMA have produced recommendations, which they published on 11 January 2013. This involved a total of four documents:

• a report on the administration and management of Euribor by Euribor-EBF,
• an open letter to Euribor-EBF with recommendations for remedying the flaws found in the review,
• Recommendations to the national supervisory authorities on supervisory oversight of activities related to banks’ participation in the Euribor panel, and
• a consultation paper on principles for benchmark-setting processes in the EU.

Euribor-EBF wants to implement the recommendations

The two European supervisory authorities propose, amongst other things, restricting the panel banks' influence in the Euribor-EBF committees, reducing the number of Euribor rates from 15 to the seven most used, making the requirements concerning the data banks submit for setting the interest rate more specific, and regularly monitoring compliance with these requirements.

Although the EBA and ESMA cannot give Euribor-EBF legally binding instructions, Euribor-EBF has already publicly signalled its intention to implement the European authorities' proposals.

Recommended requirements already in the German Banking Act and MaRisk

The recommendations to the national supervisory authorities were jointly drawn up by the EBA and ESMA, but were formally only published by the EBA. They complete the EBA guidelines on internal governance and their content corresponds to the requirements which BaFin already imposes on the processes of German panel banks on the basis of section 25a of the German Banking Act (Gesetz über das Kreditwesen – KWG) and Minimum Requirements for Risk Management (Mindestanforderungen an das Risikomanagement – MaRisk).

The recommendations include complying with the four-eye principle for all submissions to Euribor-EBF, stricter internal and external auditing, clear responsibilities and instructions to avoid conflicts of interest, and extensive record-keeping requirements.

Banks decide for themselves whether to participate

In recent months, several European banks have left the Euribor panel citing strategic reasons. The European supervisory authorities recommend that both Euribor-EBF and the national supervisory authorities encourage institutions to continue to participate in setting the reference rate. As a rule, BaFin considers involvement in setting a private benchmark to be a business decision for the bank. BaFin's Chief Executive Director Raimund Röseler addresses this issue in his interview.

The aforementioned consultation paper relates not just to Euribor, but to benchmarks in general. The paper puts a series of principles for setting and using benchmarks forward for discussion. These principles are intended as a transitional arrangement for the period until binding European legislation on this issue comes into force, the intention being for them to serve as a basis for the future body of rules. The EBA and ESMA therefore intend to coordinate closely with the European Commission, which also carried out a consultation on benchmarks and indices in 2012. BaFin was one of the participants in this consultation whose findings are intended to form the basis for legislative initiatives. The deadline for comments on the EBA and ESMA's consultation paper is 15 February 2013.

BaFin's Chief Executive Director Raimund Röseler: “Business decision”

Mr Röseler, what do you think of the recommendation by the EBA and ESMA to encourage banks to continue participating in setting Euribor?

BaFin will not interfere there. Whether an institution participates in setting a commercial benchmark or not is entirely its own business decision. If it does participate, however, it has to implement proper processes – and that's where we come in.

Do the recommendations which are currently being discussed mean a major change for the banks?

Not for German banks. The recommendations are substantially consistent with the requirements of our Minimum Requirements for Risk Management in Banks (Banken-MaRisk) for quotation processes. In any event, the recommendations merely set out what we expect banks to do as a matter of course. No one intends to put on the regulatory thumbscrews with excessive requirements.

Will the reform bring the desired success then?

The consultations by the EBA, ESMA and IOSCO will certainly provide us with valuable insights for reforms. But I doubt that it is possible to effectively reform the setting of rates such as LIBOR and Euribor. We have already seen how susceptible benchmarks are to manipulation when they are only based on estimates of market participants. If you also consider that there can be repeated periods in which there are hardly any real transactions on which the calculation could be based, then I wonder how resilient a benchmark of this type is. I think we should not only work on the reform, but also on replacing the system. However, abolishing Euribor at short notice would result in major legal uncertainties. The EBA and ESMA's proposals are thus definitely a sensible interim solution.