Regular readers know that the only way to restore 'moral integrity' is the simple solution to require the banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.
Transparency restores 'moral integrity' because sunlight is the best disinfectant for bad behavior.
In the case of Libor, banks providing ultra transparency is also needed so that the interbank lending market unfreezes. Ultra transparency provides the data that banks with deposits to lend need so they can independently assess the risk of the banks looking to borrow.
It is only with the ability to make this independent assessment on an ongoing basis that the interbank lending market will unfreeze and remain unfrozen.
It is only the ability to makes this independent assessment that addresses the reason that the Financial Crisis Inquiry Commission said that the interbank lending market froze: banks could not tell which banks were solvent and which banks were not.
As your humble blogger has previously said, with the interbank lending market unfrozen, ultra transparency also provides the transaction data needed for calculating Libor.
Bank of England Governor Mervyn King said global central bankers agreed to set up an inquiry into Libor after confidence collapsed in the benchmark rate for more than $500 trillion of securities....
The Bank of England became embroiled in the scandal, and lawmakers criticized it last month for “naivety” in its handling of questions about the rate as far back as 2007.
“The central banks have somehow got to get moral integrity back in the financial system, and King will feel this himself,” said Marcus Miller, a professor of economics at the University of Warwick, England. “If you can’t trust London to fix the rate, what’s the banking system all about?”...What is important is not just that the central banks and London fix the rate, but how they fix the rate.
Do they require ultra transparency or do they come up with a complicated set of rules that substitutes rules and the regulators for the market?
Libor is derived from a survey of banks conducted each day on behalf of the British Bankers’ Association in London. A lobby group representing the banking industry in Brussels, Washington and Hong Kong said today that all systemically significant financial benchmarks should be subject to regulatory oversight following the Libor scandal.
“The key benchmark indexes around the world need to be subject to consistent, transparent and sound practices to ensure the smooth functioning and efficiency of global financial markets,” the Global Financial Markets Association said in a statement on its website....Naturally, the finance lobbyists would like substituting rules and the regulators for the market and would like only regulatory oversight.
With ultra transparency, there is both regulatory and market oversight. As a result, the key benchmark indexes, like Libor, are subject to consistent, transparent and sound practices that ensure the smooth function of efficient global financial markets.
Carney, who is chairman of the FSB, has said the board will consider alternatives to the rate, while the European Union has also pledged tougher supervision of Libor, Euribor and other market indices. It’s weighing options such as forcing banks to provide real transaction data rather than estimates and increasing the number of lenders involved in the rate setting.
“We’re very pleased that there is awareness globally on the need to tackle how interbank lending rates are set,” said Stefaan De Rynck, a spokesman for the EU’s financial services chief, Michel Barnier. “For action to restore trust in interbank lending rates, including Libor, co-ordination is needed at global level.”All that has to be co-ordinated at a global level is the requirement to provide ultra transparency.