Just like Libor, Tibor was not set based on actual transactions, but rather on submissions by the banks. Submissions that consistently overstated Tibor.
Regular readers know that the only way to restore trust in Libor, Tibor, Euribor and other benchmark interest rates is 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.
With this information, banks with deposits to lend can assess the risk and solvency of the banks looking to borrow. This keeps the interbank lending market open.
With this information, all of the benchmark interest rates can be based on actual transactions.
A former star trader in Tokyo has accused Japanese banks of operating a “cartel” in loan pricing, forcing higher rates on millions of borrowers and hampering central bank efforts to spark lending in the world’s third-largest economy.
Hideto “Eddy” Takata, a former derivatives trader who worked for several investment banks until 2008, claims in a self-published book coming out this month that Japan’s banks have collectively kept the Tokyo interbank lending rate [Tibor] benchmark “artificially high” since the global financial crisis to boost profits on domestic products such as mortgages, almost all of which are linked to Tibor.
Since early 2009, Tibor rates have been much higher than yen Libor rates, which are generally used outside Japan. In theory, the two rates should be very similar because they are both used as a reference for borrowing in the same currency.
The current premium for three-month Tibor is about 13 basis points over yen Libor. Since early 2011, the spread has held steady, ranging from 13 to 15 basis points.
Mr Takata says the premium that existed between 1997 and 1999 when the Japanese banking system was rocked by bankruptcies may have been justified. But he argues there should be no discrepancy now because Japan’s financial system has been stable for several years.
Credit-market specialists agree that Tibor and yen Libor rates should be similar – as they were for seven years until 2007 when fears over US and European banks began to emerge.
Explaining how Japanese banks have profited from the spread between Tibor and yen Libor, Mr Takata says: “If Japanese banks need to borrow, they use Libor. If lending, they use Tibor. No other country has a double standard like this.”
The collusion allegations, which Mr Takata admits are based on “circumstantial evidence”, could open a new front in the sprawling regulatory probe into allegations that big US and European banks manipulated the rate setting process for Libor and other key benchmark lending rates.
So far, regulators have focused on allegations that the banks sought to move the rates around to make money on derivatives and make themselves appear stronger during the financial crisis, rather than to affect the prices of ordinary loans.....
Tibor rates are gathered and published by the Japanese Bankers’ Association, while the mostly non-Japanese banks who quote yen Libor rates provide their submissions to the British Bankers’ Association.
Under the JBA’s self-policed system, banks are asked to quote what they think are the prevailing market rates. However, according to the Association of Call Loan and Discount Companies – an industry body that records actual transactions – the average rate for a couple of three-month transactions in December was 0.17 per cent, while three-month Tibor averaged 0.32 per cent.
“It is rigged,” said a credit strategist, giving his opinion on condition of anonymity. “If banks cut Tibor, they’d lower their margins. But with interest rates so low [in Japan] by global standards, they need to make a living.” ....
“Yes, the manipulation for trading profit was wrong,” Mr Takata said. “But the organised manipulation of rates by Japan’s banks is much worse.”