In theory LIBOR is supposed to be a pretty hones number because it is
assumed that banks play by the rules and give true estimates. The market
is also sufficiently small that bank presumed to know what the others
are doing. In reality the system is rotten. first it is based on banks'
estimates rather than the actual prices at which banks have lent to or
borrowed from one another.
A second problem is that those involved in setting the rates have often had every incentive to lie since their banks stood to profit or lose money depending upon the level at which LIBOR was set each day .
In the case of Barclays 2 very different sorts of rates fiddling have emerged. The first , involved groups of derivatives traders trying to influence the rate. The sum involved might have been huge. Barclays was the leader of these derivatives sorts. Barclays has tried to present these incidents as action of few rogue.The FSA has identified price rigging dating back to 2005 yet some say problem go back much further.
The second sort of LIBOR rigging has also emerged in the Barclays settlement. They submitted dishonestly low estimates of bank borrowing cost over at leat two years, Almost all banks in the panel were submitting rates that may have been 30-40 basis points too low on average.Also there are many stories which bring regulators into considerations and the losses of sub-prime crises suffered by the banks as the reacion of rigging.
CHANGES
Two big chances are needed. the first is to base the rate on actual lending data where possible. Some markets are thinly traded, though, and so some hypothetical or expected rates may need to be used to create a complete set of benchmarks. So a second big chance is needed. Because banks have an incentive to influence LIBOR, a new system needs to explicitly promote truth telling and reduce the possibilities for co-ordination of quotes.
A second problem is that those involved in setting the rates have often had every incentive to lie since their banks stood to profit or lose money depending upon the level at which LIBOR was set each day .
In the case of Barclays 2 very different sorts of rates fiddling have emerged. The first , involved groups of derivatives traders trying to influence the rate. The sum involved might have been huge. Barclays was the leader of these derivatives sorts. Barclays has tried to present these incidents as action of few rogue.The FSA has identified price rigging dating back to 2005 yet some say problem go back much further.
The second sort of LIBOR rigging has also emerged in the Barclays settlement. They submitted dishonestly low estimates of bank borrowing cost over at leat two years, Almost all banks in the panel were submitting rates that may have been 30-40 basis points too low on average.Also there are many stories which bring regulators into considerations and the losses of sub-prime crises suffered by the banks as the reacion of rigging.
CHANGES
Two big chances are needed. the first is to base the rate on actual lending data where possible. Some markets are thinly traded, though, and so some hypothetical or expected rates may need to be used to create a complete set of benchmarks. So a second big chance is needed. Because banks have an incentive to influence LIBOR, a new system needs to explicitly promote truth telling and reduce the possibilities for co-ordination of quotes.
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