Banks seek to maintain ability to manipulate Libor and similar rates

A Bloomberg article shows how a major bank lobbying organization defends the banks' ability to manipulate Libor and similar benchmark interest rates.

The reason that banks are trying to defend their ability to manipulate Libor and similar benchmark interest rates is that this manipulation is immensely profitable for the banks.

Regular readers know that the only solution for restoring trust in Libor and similar benchmark interest rates and ending the ability of the banks to manipulate these interest rates is to base these interest rates off of actual transactions that are reported by the banks under ultra transparency.

Under ultra transparency, banks are required to disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

With this information, the market for unsecured interbank lending unfreezes and remains unfrozen as the banks with deposits to lend can assess the risk and solvency of the banks looking to borrow.

Libor and similar benchmark interest rates can then be based off of all or a subset of the transactions that result in the interbank lending market.

The London interbank offered rate will face a prominent U.S. critic today as financial regulators look to improve oversight after three banks paid more than $2.5 billion in fines to settle interest-rate rigging charges...

The gold standard for oversight of Libor and similar benchmark interest rates is requiring the banks to provide ultra transparency.

CFTC Chairman Gary Gensler has questioned the long-term viability of Libor and other benchmark rates, saying the underlying markets must be based on transactions and not estimates from banks. 

“One of the really challenging things is how systemic this is,” Gensler said in a Feb. 21 interview. “This is like a reference rate that is too big to replace.... 

“Anchoring to real transactions is essential to have confidence in these benchmarks,” Gensler said in the interview. “The banks are right now estimating something that isn’t an active market.”

Requiring the banks to provide ultra transparency results in a twofer:  an active unsecured interbank lending market so banks don't have to estimate anything and the ability to anchor these benchmark interest rates to real, verifiable transactions.

The Global Financial Markets Association, a trade association representing securities advocacy groups in Europe, the U.S. and Asia, said benchmarks don’t need to be based on actual transaction data.

Please re-read the highlighted text as here is the big bank lobbying firm defending the banks' ability to manipulate Libor and similar benchmark interest rates.

Some markets have little transaction volume and still benefit from having a benchmark, the groups said.

The reason that some markets have little transaction volume is that banks are 'black boxes' and the banks with deposits to lend are uncomfortable lending to banks looking to borrow because they cannot assess the risk or solvency of the borrowing banks.

By curing the 'black box' problem with ultra transparency, the market unfreezes and has lots of transaction volume.

“GFMA believes that it is unnecessarily limiting to mandate that a benchmark be based solely on actual transaction data,” the organization said in a Feb. 11 letter to the task force.

Please re-read the highlighted text as the big bank lobbying firm is defending the banks' ability to manipulate Libor and similar benchmark interest rates by claiming it is a good thing.

At the same time, the big bank lobbying firm is arguing against requiring the banks to provide ultra transparency so that Libor and similar benchmark interest rates could be based off of actual transactions.

“Provided that a sufficiently robust governance and control framework is in place and there is clear transparency, benchmarks determined under a variety of methods can be of great value to users.”

Translation:  financial regulators please substitute a combination of complex rules and regulatory oversight for the combination of transparency and market discipline.

With the combination of complex rules and regulatory oversight, the banks can continue to manipulate for profit Libor and similar benchmark interest rates.

With transparency and market discipline, banks lose their ability to manipulate Libor and similar benchmark interest rates.