Libor Scandal

Regular readers know that your humble blogger has already suggested how to reform the Libor system in a simple way that is consistent with the intent of what the Libor interest rate is suppose to show and that market participants can have confidence in.

Specifically, I have recommended that banks are required to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

The reason for doing this is so that Libor could be based off of all the actual trades.

One concern is what happens if there are no trades for a particular Libor currency or maturity.

There are two reasons that there might not be trades.  First, the interbank lending market is frozen.  Second, banks elect not to trade in that currency or maturity.

The interbank lending market has frozen repeatedly since the beginning of the financial crisis because banks cannot assess the risk of any other bank.  As a result, the banks cannot determine the proper amount or price for their exposure to any other bank and therefore, the banks do not lend.

The reason for requiring banks to provide ultra transparency and disclose all of their exposures and not just their funding exposures is that ultra transparency provides the data that each bank needs in order to assess the solvency of every other bank and determine the amount and price they are willing to lend to each of the other banks.

Ultra transparency is the key to unfreezing the interbank lending market and to preventing it from freezing again.

So long as the interbank lending market is functioning, there are a number of ways to determine a Libor interest rate when a specific currency or maturity is not traded.  For example, if there are trades available to calculate a Libor interest rate for both a shorter and longer maturity than the maturity that was not traded, it is easy to mathematically determine an interest rate for the non-traded maturity.

Your humble blogger is agnostic to which of these solutions is adopted.  What is important is that there is ultra transparency so that the interbank lending markets do not freeze in the future.

Manipulating Libor is manipulating the price of money
Rate rigging shows corruption at the heart of finance
Policy of systemic dishonesty being blamed on few rogue traders

How I manipulated Libor
Bob Diamond confesses:  Barclays manipulated Libor to protect bank image during financial crisis
Barclays admits to manipulating Libor
Barclays told Fed it was manipulating Libor

BoE's Paul Tucker:  Libor is a cesspit and other self-reported markets are probably manipulated too

Surprise, Banking Group overseeing Libor resists change despite manipulation of rates

Credibility of central bankers and financial regulators ended with Libor scandal
Regulators now under the spotlight
Call by BoE to Barclays highlights potential for misunderstandings when banks don't provide ultra transparency
Geithner memo shows Fed protecting opacity that let Libor be manipulated
Libor scandal shines bright light on regulators
Dodd-Frank casualty of Libor scandal

Libor manipulation could have cost borrowers billions

British Bankers' Association asks regulators to oversee Libor
Geithner and NY Fed's recommendations for Libor were talking points from banks manipulating Libor

Libor and the destruction of trust
A quarter of Wall Street professionals see wrongdoing as key to success
Will Barclays realize that only providing ultra transparency will restore trust?
After Libor Scandal, banks need to provide ultra transparency to regain trust?

BoE's Mervyn King calls for Libor to be based off of actual trades
How do you solve a problem like Libor?

FT's Gillian Tett:  Libor scandal shows how banks use and protect opacity
Libor-gate could finally trigger bank reform

Morgan Stanley:  Libor scandal leading to more transparent trading

No comments: