British Bankers' Association asks government to regulate Libor

The Financial Times is reporting this morning that the British Bankers' Association is asking the UK government to step in to regulate and supervise how Libor is set.

Regular readers know that the only way to restore confidence in Libor is by basing it off of actual trades that are disclosed to all market participants.

As a result, the BBA is asking the UK government to require that banks provide transparency and disclose all of their asset, liability and off-balance sheet exposure details.

It is only with this data that market participants can cross-check one bank's assets with another bank's liabilities.

It is only with this data that market participants can decide which trades to include in setting Libor.

The British Bankers’ Association has asked the UK government to consider regulating and supervising the setting of the London interbank rate offered rate at the heart of Barclays’ £290m penalty for rates manipulation. 

Under a historical quirk, the process of setting Libor has always been considered a private activity run by the banking trade body, although the banks who participate in the rate-setting process are regulated by the Financial Services Authority. 

Barclays admitted Wednesday that its submissions to the Libor process were improperly affected by requests from traders to move the rate to the benefit of their derivative positions, as well as by a desire to make the bank look stronger during the financial crisis.....

The goal of disclosure is to provide market participants with an accurate picture of what is happening.  Barclays' desire to paint a false picture of greater strength confirms the need for ultra transparency.

The BBA is currently reviewing the way Libor, which is the basis for $350tn in contracts world wide, is set amid probes that have swept in nearly 20 banks and a dozen regulators on three continents. 

In a statement on Thursday, the trade body said: “The British Bankers’ Association is shocked by yesterday’s report about Libor.

Shocked in the same way as discovering that there is gambling going on?

“The current Libor review, with which our authorities are fully engaged, has been under way since March this year and is considering all aspects including the setting process. As part of this review we will now be asking the authorities to consider in what manner the Libor setting mechanism should be regulated in the future.”

Update
The Lex column of the Financial Times supports your humble bloggers call for using actual data.

But it is also important that the industry and the regulators now rethink the way in which Libor is calculated. 

Whenever possible, benchmark rates should be based on actual interbank lending rates, which are more difficult to manipulate.

So that market participants can confirm the actual interbank lending rates and eliminate manipulation requires banks provide ultra transparency.

Estimates should only be used when hard data are not available and these should be routinely cross-checked against other data on bank-risk, with corroboration sought from other banks, so as to identify who is cheating. 

From personal loans to mortgages, Libor affects the entire credit market. A benchmark that cannot be trusted has no point.

Please re-read the highlighted text and remember that in the financial markets trust is a direct result of disclosure!

Update II
Regular readers know that your humble blogger has been writing on and talking about opacity and the harm opacity causes the financial markets since before the financial crisis.  I have always done this talking about the solution:  transparency.

They also know that your humble blogger has focused on structured finance and banks as examples of opaque areas of the financial system that need the sunlight provided by transparency to disinfect them.

Finally, they know that Libor is just another example of opacity and the harm it does to financial markets.

That said, I want to offer a special recognition to ZeroHedge for identifying and calling attention to the Libor scandal.  ZeroHedge has done a terrific job in discussing the who, what and why of the Libor scandal and calling attention to it in the first place.

If your humble blogger has added any value to the discussion, I hope it is in talking about how transparency can be used as the basis for a 'new' Libor that can be trusted and not manipulated by the banks.