If you look at the British Bankers Association website you will see that each contributing bank to the LIBOR rate setting has to answer the question: “At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?”
So BBA LIBOR is not necessarily based on actual transactions. This is an important point.
It seems to me that the latest scandal to hit the markets is little understood by most of the vociferous market spokesmen and commentators.
I am not condoning wrongdoing that Barclays have owned up to but we do need to get this in perspective. First of all LIBOR is not some mathematically computed number which is always accurate to within fractions of a basis point. It is a number derived by dealers in prime banks talking to each other having observed the yield curve and the latest supply and demand for money in the markets and for them at that moment. It is a matter of opinion.
Even if Barclays were a sole outlier in the LIBOR rate setting, the effect would have been eradicated. Every BBA LIBOR rate is calculated using a trimmed arithmetic mean of all rates submitted to them. Once all rates are received the rates are then ranked in descending order and the highest and lowest 25% of submissions are excluded - this is the trimming process.
Looking at the second of the two breaches by Barclays; that they rigged the LIBOR rates between September 2007 and May 2009 by making LIBOR submissions which took into account concerns over the negative media perception of Barclays’ LIBOR submissions.
In other words they were looking to mask any Barclays’ specific problems.
Well I well remember this time vividly and as someone who has operated in the sterling money markets since the 1970’s I can assure you that what was happening at that time was far from normal. We were seeing major banks worldwide finding difficulty with raising money in the markets to cover their liquidity positions. The first major warning sign of the credit crisis that I observed was a movement in 6 month LIBOR in excess of 65 basis points above Bank Rate and with no yield curve cause. In other words it wasn’t that banks thought that rates would rise, it was simply that banks were struggling to fund themselves and would pay “whatever it cost” to cover funding positions. Very scary! There were rumours abounding about ‘major banks being in difficulties’. In this market it must have been tricky for any bank to fix a normal LIBOR setting for the BBA. To signal that your bank had a worse position that others and therefore had a problem must have been a real cause for concern.
I could quite understand in fact why it may have been prudent to agree with the Bank of England that a ‘normalised’ LIBOR rate should have been quoted and to take out the peaks and troughs of a far from normal market. But this does not appear to have been the case based on Bob Diamond’s evidence yesterday. Let’s see what Paul Tucker has to say. I’m not trying to make excuses for others and certainly have no axe to grind with Barclays but in relation to the LIBOR fixings in extreme markets maybe we need to reflect on just what was happening in a very hostile real world.
Just as an afterthought however, Bob Diamond’s letter to Andrew Tyrie ahead of the meeting said “The interventions in question were typically on the short term one and three month rates relevant to the wholesale markets and not the longer term rates used to set, for example, retail mortgages.” What planet has Bob Diamond been on? Mortgage rates are set relevant to short dated LIBOR rates such as 1 month and 3 month and not 6 or 12 months.
Sorry but this just doesn’t add up! Get a grip Mr Diamond.
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