Monday, September 17, 2012

Cure for Libor scandal requires regulators to give up information monopoly

The Libor scandal has reached a very interesting point.  The only solution that market participants will trust is if the banks are required to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

If the global regulators allow this to happen, it will dramatically diminish their ability to substitute complex regulations and regulatory oversight for transparency and the market.

This point is worth repeating.

Fixing Libor and similar index rates requires the global financial regulators to give up the power and prestige they derive from replacing the market and making the market dependent on them.

All market participants know that transparency and the sunlight it brings with it are the best disinfectant for bad behavior.

As a result, the last thing the banks want is ultra transparency.

Fortunately for the bankers, the global financial regulators are on their side as requiring ultra transparency deprives the regulators of power and prestige.

As a result, the bankers and regulators are working together.  If the banks can get the global financial regulators to substitute themselves through 'oversight' for transparency, the bankers know they can continue to engage in bad behavior behind the oversight veil of opacity.

As reported by Bloomberg,

Global regulators and central bankers debated tougher oversight of interbank lending rates in the wake of the scandal engulfing Libor, according to an EU official.... 
[Financial Stability Board] Chairman Mark Carney told reporters last month that the FSB would seek to ensure that “the world transitions to a better version of reference rates” with “buy-in globally.” 
Confidence in Libor, the benchmark interest rate for more than $500 trillion of securities, plummeted following Barclays Plc (BARC)’s admission that it submitted false rates. The revelations have provoked renewed calls for tougher oversight of the financial system and pushed regulatory probes of interbank lending rates to the top of the political agenda. 
EU representatives on today’s call outlined steps the 27- nation bloc is taking in the wake of the Libor scandal, including a bolstering of market-abuse sanctions and a consultation on overhauling governance of how market benchmarks are set, said the official, who wouldn’t be cited by name because the talks are private.....

The International Organization of Securities Commissions, which represents regulators in more than 100 countries, last week announced a task force to investigate benchmarks such as Libor after allegations banks rigged the rate.

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