Wednesday, November 14, 2012

ECB calls for basing Euribor on actual trades

The ECB called for keeping Euribor citing a need for a benchmark rate for unsecured bank funding costs and revamping it so that it is based off of actual trades.

Regular readers will recall that your humble blogger made the same points about Libor.  My solution was 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.

This disclosure would solve two problems.

First, it would unfreeze the unsecured interbank lending market as banks with deposits to lend could now independently assess the risk of the banks looking to borrow.

Second, it would end manipulation of the benchmark rate as all transaction data would be available to market participants and they could use this data to calculate the benchmark rate.

Not surprisingly, the banks, the lobbyists and the financial regulators are pushing back against ultra transparency as the solution (please recall that in the UK, the Wheatley Review refused to publish my submission).

From a Reuters article,

The European Central Bank is demanding an overhaul of the system for setting market interest rates in the euro zone in the wake of a scandal that engulfed banks setting the rival Libor benchmark rate. 
In its response to a European Commission consultation on the future of the 'Euribor' rate, the ECB and the 17 national central banks under its umbrella said the system needs more transparency and actual data instead of just banks' estimates. 
There is "significant scope for Euribor reform," the bank said. 
Euribor, the euro interbank-offered rate, and its larger counterpart the London Interbank Offered Rate (Libor) are Europe's key gauges of how much banks pay to borrow from peers. The two rates underpin swathes of financial products from Spanish mortgages to derivatives contracts in London.... 
Amid a collapse in interbank lending following the financial crisis, the ECB said Euribor reform should first address short-term fixes for the benchmark to regain confidence and then move on to more complete reform in the longer term.... 
It rejected scrapping Euribor in favour of an alternative, referring to long-standing contracts and saying such a change could "entail significant legal and financial stability risks". 
Moreover, it is important that, despite a rise in collateralised lending, there is a need for a benchmark rate for unsecured funding costs.

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