Cheat sheet — geddit, dude.
While Bob no doubt breathes a sigh of relief at having survived the morning after, the other twenty banks lawyer up and pray, and the BBA says it’ll be constructive with regulators…
Click to enlarge for a look at Libor reforms which Credit Suisse thinks the BBA will probably consider:
Most of which would move the rate higher.
The Credit Suisse note itself — find it here — includes an analysis that suggests what might happen were the BBA to combine the third and last ideas: include other unsecured funding instruments in a market-based setting.
The strategists construct a “synthetic Libor” by adding the panel members’ twelve-month CDS spread and twelve-month OIS, then comparing the result against one-year Libor. The result: higher volatility, and right now a pricing towards the weaker panel members, although that would not always have been in the past.
Which is interesting in itself. But there also much bigger implications here…
1) This is the starting point for regulating Libor. Our point in mentioning this being that part of the The Mess The Price Of Money Is In is that the Libor-setting process has been barely, if at all, regulated. That’s always a point to remember we think.
2) Note where the options sit with the possibility of Libor being based on “actual transactions”, which is already a “focus” of the CFTC. The Credit Suisse analysts note that it may be difficult to build certain term rates on actual trades. To a great extent, they’re just not there.
As Matt asked, what is Libor then?
By Cardiff Garcia and Joseph Cotterill
Libor coverage – FT Alphaville