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The Federal Reserve’s top attorney told US Senate aides that the Fed lacked jurisdiction to police banks that may have attempted to manipulate Libor.
The New York Fed said last week that it became aware of “problems” with Libor in late 2007. In a closed-door Friday afternoon briefing for the Senate banking committee, Scott Alvarez, the Fed’s general counsel, told Senate staff that the Fed was unable to clean up issues identified with the London interbank offered rate, people familiar with the matter said.
In response to questions from Senate aides, Mr Alvarez said that the Fed was unable to do more because the alleged manipulation of Libor did not constitute a so-called “safety and soundness” concern – a term used by bank regulators to signify threats to a lender’s viability.
Mr Alvarez added that the Fed did not have such concerns with US banking groups. Bank of America, Citigroup and JPMorgan Chase are the only US banks to submit borrowing costs to the Libor panel.
Lawmakers on both sides of the Atlantic have raised concerns that regulators knew about attempts to rig the lending gauge, yet looked the other way as possibly improper activities continued.
The New York Fed in 2008 alerted the US Treasury, the Fed’s board of governors, the Commodity Futures Trading Commission and the Securities and Exchange Commission to its concerns with Libor. It also recommended reforms in a memo to the Bank of England.
But there is no public evidence that regulators warned the banks to stop, alerted market participants or communicated their concerns to the general public. Fed officials often express their concerns about market conditions or troublesome aspects of the financial system in public speeches. Tim Geithner, who was then the New York Fed president and who now serves as Treasury secretary, gave no such speeches about Libor.
The Fed and New York Fed declined to comment. The Treasury declined to comment and referred questions to the New York Fed.
The comments from the Fed’s top attorney come before a Tuesday hearing in the Senate banking committee featuring Ben Bernanke, Fed chairman. Mr Bernanke is expected to address the probe into Libor and answer questions over whether the Fed did enough when it found that some banks may have been rigging the lending gauge.
Last week, a dozen senior US lawmakers urged the nation’s top law enforcement officer to hold regulators accountable if they knew about manipulation of Libor but did nothing.
“We are … troubled by allegations that US and foreign bank regulators may have been aware of this wrongdoing for years,” the lawmakers wrote. “Just like the banks and executives they oversee, regulators who were involved should be held to account for any failures to stop wrongdoing that they knew, or should have known about.”