Friday, August 3, 2012

Will Sweden adopt ultra transparency as part of overhaul of Swedish Libor?

Reuters reports that Swedish banks and regulators are looking at overhauling the Stockholm Interbank Offered Rate (Stibor, the Swedish Libor) by basing it off of actual transactions.  However, they are not limiting themselves to just disclosure of actual transactions, but are looking at what else they can do to ensure that the interbank lending market is remains unfrozen.

Unfreezing and keeping unfrozen the interbank lending market requires that banks provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

With this detail information, lending banks can independently assess the current risk of borrowing banks.  This ability to independently assess risk unfreezes the interbank lending market and keeps it unfrozen.

Sweden is scurrying for ways to boost the credibility of its interbank lending rate, a benchmark linked to some $6 trillion in financial contracts, following a storm over potential rate rigging around the globe. 
The five contributing banks are to meet at the end of August to hammer out ways to improve the way the daily Stockholm Interbank Offered Rate (Stibor) is set in the wake of the scandal over Libor, the London equivalent. 
Sweden's central bank is working on its own review, due in the fall. 
"The most important thing for our industry is that Stibor has transparency and is 100 percent trustworthy," said Rikard Josefson, chief executive at Lansforsakringar Bank, part of a pensions and insurance firm which uses the rates in many of its contracts but is not on the rate-setting panel.
The only way to achieve this is if the banks provide ultra transparency. That way the market can verify the trades included in the calculation of the interest rate.
Unlike Libor, .... banks set the rate by saying what they are willing to lend at, not the level at which they think they could borrow, meaning there is less incentive to cheat. 
However, critics say the way it is set also lacks transparency and can be improved....

One idea touted by banks is to ensure the rates are backed by actual interbank deals, something not required today. 
British authorities are also looking into the feasibility of using actual trades for Libor rather than offered rates. 
"It would be good to show there are real transactions behind the reference rate," Peter Hagberg, head of treasury at SEB , told Reuters. 
"The credibility would come if you could just find from time to time, documented transactions taking place among banks."
This is an argument for transparency.
Jan-Peter Larsson, Global Head of Trading at Danske Markets , agreed that basing the rate on real underlying transactions would help increase confidence. 
The problem, however, is that since the 2008 financial crisis, interbank lending has been thin not just in Sweden but around the world, meaning credibility might improve only marginally....
Ultra transparency is needed to address the problem that the interbank lending market is thin to frozen.

So the question is, will Sweden lead the way with requiring ultra transparency?

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