Is the LIBOR to be Scrapped?

by Mark Johnston

                                 Is the LIBOR to be scrapped?

The LIBOR stands for the London Interbank Offered Rate and is used to influence a wide array of financial products from mortgages to credit cards. Therefore it is crucial that markets have absolute confidence in it. Currently it is calculated from the rates banks say they expect to pay to borrow money from other banks.

Recent headlines however are screaming about the LIBOR scandal which is insider trading on a gigantic scale.

The LIBOR scandal revealed that the system, which is currently overseen by the British Bankers Association (BBA), had been abused.

During the financial crisis some banks manipulated the rate. Barclays and other banks submitted fake LIBOR rates lower than the banks actual borrowing costs in order to disguise how much trouble they were in.

Now central bankers and regulators will hold talks on whether the troubled global LIBOR interest rate can be reformed or whether it is so damaged that the benchmark of borrowing costs should be scrapped.

Trust in a vital part of the financial system has been lost due to the scandal and now timely action is needed to regain it.

Regulators fear that as membership of the LIBOR panel is voluntary, the limited number of banks involved makes it open to manipulation.

Mervyn King, governor of the Bank of England stated that it was “very clear that radical reforms of the LIBOR system are needed”.

Martin Wheatley, of the Financial Conduct Authority, will argue that “the existing structure and governance of LIBOR is no longer fit for purpose”. He added “our core purpose will be to make sure financial markets work well so that consumers get a fair deal”.

Experts believe that it is also important to remember that most banks have posted figures accurately and therefore care must be taken not to tar all institutions in the panel with the actions of some.

It is also worth noting that now these inaccuracies in the rate have come to light and with regulators now watching the LIBOR like hawks, the risk of any more abuse is now very low.

An option for reform could include forcing all banks to join a new LIBOR calculation system and making the people who submit returns to it liable for criminal prosecution if they submit false data.

Other experts feel that the Australian Bank Bill Swap Rate (BBSW) may provide a useful model to follow as rate are based on actual trades rather than on self reported estimates.

Another option which has been suggested is to build an overnight index swap, which track market expectations for central bank rates.

Peter Vicary-Smith, chief executive of Which?, said: “Mr Wheatley has said it’s vital to rebuild trust in the Libor setting process, but the bigger job is to rebuild trust in banking that has been shattered by one scandal after another

The Government and regulator must now also thoroughly investigate the impact of LIBOR rate-rigging on ordinary borrowers and savers. 


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