With this information, Libor could be based on actual transactions.
With this information, the interbank lending market would unfreeze as banks with deposits could always assess the risk of the banks looking to borrow. As a result, Libor would truly provide an objective measure of bank borrowing costs.
However, banks do not want the simple fix of providing ultra transparency. Their current business models are based on profiting from opacity. To protect this opacity, Wall Street would prefer to create a "New" Libor based off an entirely different interest rate.
As describe in a Bloomberg editorial, the two leading contenders are overnight index swaps and the general collateral repo index. Both of these contenders are flawed and would not be as simple a fix as requiring the banks to provide ultra transparency.
Overnight index swaps are contracts based on the so-called federal funds effective rate, which is the interest U.S. banks charge one another on overnight loans. The underlying loans are observable: The Fed records them and publishes a weighted average interest rate every day. Problem is, banks tend to pull out of the market during times of stress, leaving it too small and too easily skewed to provide a true picture of borrowing costs....In short, overnight index swaps suffer from the same problem as the interbank lending market. It freezes because the lending banks are unable to assess the risk of the borrowing banks. Curing this problem requires the borrowing banks to provide ultra transparency.
So long as the banks are providing ultra transparency, there is no need to not simply use the actual transactions that would correspond to the original definition of Libor.
The general collateral repo index looks like a better option. It tracks the very large market for repurchase agreements, known as repos, typically overnight loans made against good collateral such as U.S. Treasuries.
The Depository Trust & Clearing Corp. publishes a daily weighted average of the actual interest rates paid on these loans. Aside from being secured by collateral, a large portion of the loans are processed through a central counterparty that protects the system against default by any one participant. These features make the repo market, and especially the part that uses Treasuries as collateral, relatively resilient in times of crisis.However, this index also has problems when there are questions about the solvency of the borrower. Questions that again can only be answered if the borrowing bank is providing ultra transparency.
Keep in mind that most banks these days tend to package their loans into securities. They then pledge the bundled loans as collateral when they borrow in the repo market. Given the way modern finance works, an index that reflects the cost of secured lending might make more sense as a benchmark....At the beginning of the financial crisis, it was exactly these loan-backed securities that could not be used in the repo market as no one could value the securities.
In order for the asset backed securities to be valued, they must provide observable event based reporting on any activity like a payment that occurs with the underlying collateral before the beginning of the next business day.
Until a replacement emerges, regulators will have to do what they can to keep Libor honest.This is easy to do by requiring ultra transparency.