Greater Transparency Is Needed To Completely Diffuse The Damage From The Libor Scandal And Restore Trust In The Marketplace

Tuesday, August 28, 2012 07:06
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Greater Transparency Is Needed To Completely Diffuse The Damage From The Libor Scandal And Restore Trust In The Marketplace

Tags: banks | fraud | markets

Banks who participated in the Libor interest rate manipulation scandal have been exposed by global investigations. What needs to happen now is to make banks reveal data that shows just how much damage was done and which banks bear the most responsibility.

 
The London interbank rate (Libor) is a group of assessments of the borrowing costs of banks. The assessments are derived by asking banks on a daily basis how much they would pay to borrow money in 10 different countries and over 15 different time periods spanning from overnight to an entire year.
 
Two types of manipulation occurred in the scandal. One was manufactured data the banks submitted that favored their own traders. The other was the intentional reporting of lower rates published daily that made the financial health of banks look better than it actually was.
 
How long the deception went on and how widespread it was in the banking system is important. For example, if a rate was artificially depressed by .1% for only a few months, it would have resulted in a shortfall of payments in the amount of about $75 billion on $300 trillion worth of mortgages, corporate bonds, and derivatives.
 
A depression by the same amount for several years, however, would result in a shortfall of $1 trillion.
 
There have only been partial estimates to this point. Reportedly, one estimate says that both the one-month and three-month Libor rates—some of the most commonly used—were understated over the first four months of 2008 by about a quarter of a percentage point.
 
A separate study by the New York Fed showed understatement by a lesser amount but that the rate was understated by .2% or more for the two weeks immediately following the Lehman catastrophe in September 2008.
 
To show a more accurate picture of the extent of the damage, researchers need access to more specific data about borrowing costs. The investigative authorities are the ones who can force banks to submit such data.
 
It will be difficult to reestablish trust in the marketplace if such specifics are not discovered and exposed. Punishing wrongdoers is part of that process but it does not go far enough. Complete transparency is the key ingredient to reestablishing trust in any situation where it has been breached.

 

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