In defence of Libor quote-rigging, encore | FT Alphaville

In defence of Libor quote-rigging, encore

Right, this one may stick in the throat somewhat but it’s an interesting idea, a variant of which we have heard before.

From JCD Rathbone, of JC Rathbone Associates, (with our emphasis):

It is also important to take into account the conditions in the money markets over the period covered by the investigation.  This could be described as pre and post Lehmans.  The inference appears to be that Barclays were looking to push up Libor rates in the pre period when liquidity in the interbank market was plentiful, but looked to quote a low rate post Lehmans when liquidity dried up for all but the most highly rated banks.  Indeed, liquidity in the market continues, even today, to be very restricted.

One misconception in this case is that the rigging of the rate setting process will have had a major impact outside the banking world.

Libor more commonly is used on loans to corporate borrowers.  Even in this situation, rigging Libor would have a limited impact. Banks almost always require highly leveraged borrowers (e.g. property companies) to protect their borrowing costs through hedging, which in the vast majority of cases means implementing interest rate swaps.  As the floating rate on the swap offsets the floating rate on the loan, the impact of rigging Libor is removed.

Even in the case of unhedged borrowing, the impact will have been minor.  The investigation does not appear to have thrown up a situation where Libor was impacted by more than a couple of basis points in the pre Lehmans period, although it will be interesting to see whether very large unhedged borrowers look to bring legal action against Barclays to recoup their inflated funding costs.

It would be somewhat ironic if they did.  Post Lehmans, Barclays appears to have been quoting rates to the BBA that are deemed to have been too low. The fact is that at that time Barclays were not being offered any meaningful amounts of funds in the interbank market.  Nor were many other banks and at one stage 3 months Libor was trading at close to a 2.00% premium to the prevailing base rate.  This differential, even today, stands at 0.40% which reflects ongoing, if much reduced, liquidity problems.  During this period Barclays, and other banks having liquidity problems, were doing corporate borrowers a great favour by reducing Libor rates to levels that were artificially low in order to try to persuade both the market and depositors that they were not under undue pressure. They, and others, could quite legitimately have quoted Libor rates for periods of longer than one month which would have been 1% higher than those actually published by the BBA.

The effect of Barclays’ quote rigging on the real world outside the banking sector, therefore, has been benign, indeed, in terms of the economy, almost certainly beneficial.

Rathbone also argues that there would be little point in Barclays sending in overly high or low quotes in isolation as they would simply be discarded if it was acting independently — the highest and lowest quotes are removed when determining the Libor rate. Thus:

The really interesting point will be if the regulators discover collusion between the banks on a scale so large so that the exclusion of the highest and lowest rates was no longer sufficient to eradicate rogue quotes.

Well, let’s ask Panel Banks 1 through 7 – mentioned in the FSA’s Final Notice on Barclays – what they think, shall we?

Related links:
Libor, the liquidity consequences – FT Alphaville
Transacting at Libor, bro – FT Alphaville
Libor can be whatever you want it to be – Dealbreaker
Kill Bob, and other Barclays/LIBOR reaction – FT Alphaville