Wednesday, February 15, 2012

Fixing Libor requires ultra transparency

As the Libor investigation continues, it has become apparent that the financial markets will never again trust the use of bank estimates of what their cost to borrow is that go into how Libor is calculated.

There is a simple solution.  The calculation of Libor should substitute what the bank actually paid to borrow for the estimate of its cost to borrow.

Under ultra transparency, where banks disclose on an ongoing basis their current asset, liability and off-balance sheet exposure details, what a bank actually pays to borrow can be looked up simply.

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