Industry regulator launches probe into Canadian lending rate setting

OTTAWA – Canada’s financial industry regulator is looking into whether an interest rate rigging scandal that has rocked global banks could happen in Canada.

The Investment Industry Regulatory Organization of Canada said Friday it is not aware of problems, but is launching a review of Canadian practices in light of the interest-rate fixing scandal engulfing European and U.S. banks related to a wholesale lending rate known as LIBOR.

IIROC is reviewing what is known as CDOR, the Canadian dealer offered rate set at 10 a.m. each business day after a survey of nine market makers, including the big banks.

It measures what banks would charge their best corporate customers for syndicated loans, and would have little bearing on consumer loans such as mortgages, analysts said.

“While we are not aware of concerns at this time with the setting of CDOR, recent experiences with LIBOR point to a need for increased scrutiny of such survey-based reference rates and IIROC is conducting a review of current practices among CDOR survey participants,” said Lucy Becker, IIROC vice-president for public affairs.

LIBOR, little-known outside the financial industry, is short for the London inter-bank offered rate and provides a benchmark for trillions of dollars in contracts around the world, including mortgages.

A British banking trade group sets the rate every morning after international banks submit estimates of what it costs them to borrow money.

Scotiabank economist Derek Holt said CDOR is derived at by a survey of market participants as is LIBOR, but is not the best measure of bank funding rates.

“There are better measures of the cost of funding to banks, like a weighted average of Bankers Acceptance (rate) and other short-term market measures,” he explained.

The IIROC review is not related to a Competition Bureau investigation into whether Canadian affiliates of six international banks played a role in the fixing scandal with LIBOR.

The scandal was sparked when venerable British bank Barclays admitted that it had submitted false information, resulting in a fine of US$453 million and the resignation of its chief executive.

The investigation has since spread to several other banks, including the Royal Bank of Scotland, Deutsche Bank, Citigroup and JP Morgan Chase.

The Federal Reserve Bank of New York released documents Friday that show it learned five years ago of big banks understating their borrowing costs to manipulate the key interest rate.

The documents also show Treasury Secretary Timothy Geithner, who was then president of the New York Fed, urged the Bank of England to make the rate-setting process more transparent.