One potential solution to this problem is to combine two types of inputs to compensate for the diminished volume in loans available for bank reference. The first input would follow the current Libor approach. The interbank borrowing rate—the numbers they submit—will be transparent. That is, if bank X says it borrowed at rate Y, that submission to Bloomberg would be public.
The second, supplemental inputs would consist of market-based quotes for credit default swap transactions, corporate bonds, commercial paper and other sources of credit information. Analysis of these sources of information would yield an "indicative" Blibor index.Why go for the complex when there is a simple solution for increasing the volume of interbank loans: ultra transparency?
With ultra transparency, banks disclose on an ongoing basis their current global asset, liability and off balance sheet exposure details.
With this information, banks with funds to lends can independently assess the risk of the banks looking to borrow and transactions that are priced to reflect the true risk of each bank can take place. [Imagine the impact of ultra transparency on all the other sources of credit information.]
As a result, Libor can be based on what it truly costs banks to borrow on an unsecured basis (what Libor was intended to represent from Day 1).