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Friday, January 11, 2013

Regulators call for quick fix of Euribor (the EU version of Libor)

The Wall Street Journal reports that regulators are calling for quickly fixing the Euribor benchmark interest rate so that banks can no longer manipulate it.

Naturally, given the choice between the combination of complex rules and regulatory oversight or the combination of transparency and market discipline, the regulators went the path of complex rules and regulatory oversight.

Regular readers know the combination of transparency and market discipline solves the problem with manipulation of Libor, Euribor and similar benchmark interest rates.  In addition, the combination prevents it from recurring.

With transparency in the form of banks disclosing on an ongoing basis their current global asset, liability and off-balance sheet exposure details, banks with deposits to lend can assess the solvency and risk of banks looking to borrow.  This unfreezes and keeps unfrozen the interbank lending markets.

With this form of transparency, Libor, Euribor and similar benchmark interest rates can be based on all or a subset of the actual trades in the unsecured interbank lending market.

Compare and contrast this eloquent solution to the fixing the problem and restoring trust to the benchmark interest rates with the solution proposed by the financial regulators.

Two European regulators on Friday said that the continent's most prominent benchmark interest rate has "significant weaknesses," and urged the banking group that oversees the rate to quickly revamp it. 
The regulators' conclusion represents the latest blow to the euro interbank offered rate, or Euribor, and the European Banking Federation that oversees it. The rate, which serves as the basis for trillions of euros worth of loans and other financial contracts, has been tarnished by banks' attempts to manipulate it and by the recent decisions of a handful of banks to stop being involved in setting the rate. 
The European Banking Authority and the European Securities and Markets Authority, both of which are pan-European Union agencies, have been conducting a review of Euribor and its governance since last fall. On Friday, they called for the Brussels-based banking federation to implement a number of changes within six months designed to improve Euribor's credibility. 
The regulators also stopped short of calling for Euribor to be run by an organization that is independent from the banking industry—a change that British regulators last year demanded for the London interbank offered rate, or Libor, which is controlled by the British Bankers' Association.....

Chief among the regulators' recommendations is changing the composition of Euribor's steering committee, which currently consists of bank officials. In the future, the regulators said, the panel should be made up primarily of outsiders. 
But European Banking Federation Chairman Andrea Enria said those spots shouldn't be filled by regulators, and that it will be left up to the EBF to decide who replaces bankers on the panel. 
"We are pleased to see that the agencies' recommendations go in the same direction as the preliminary steps we have already taken to reinforce the index-setting process and governance," Guido Ravoet, the EBF's chief executive, said in a statement. 
Euribor is calculated daily by aggregating data from about 40 banks, which each estimates what it would cost a theoretical "prime bank" to borrow money from a peer. 
Banks have repeatedly complained to the EBF that they are unclear about precisely how to define terms such as "prime bank," according to the minutes of the meetings of Euribor's steering committee. 
On Friday, the European regulators instructed the EBF to clarify such definitions, but didn't provide any guidance about how the group should do that.

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