There are two ways to manipulate Libor, the interbank lending rate that acts as a reference point for about $350,000bn worth of financial products.
- Low-ball your quote to the BBA.
- High-ball your quote to the BBA.
Both could have their advantages. Banks that are net borrowers benefit from a lower rate as it reduces their interest payouts. And net lender bank would benefit from a higher rate because it would receive more interest on Libor-linked products.
It’s worth noting here that the British Bankers’ Association strenuously defends its rate-setting process. The banks provide daily quotes of the rate at which they think they could borrow on the open market. But outlier submissions from reporting banks are stripped out, and the actual reported rate is the mean of the middle values.
So far, concerns about potential manipulation have usually centred on banks’ under-quoting to the BBA. But with a new investigation and focus shifting to Barclays, which escaped relatively unscathed from the financial crisis and even managed to buy bits of the collapsed Lehman Brothers in the fall of 2008, we have to ask…
… what if a bank was high-balling its quote?
The below is from a 2008 academic paper cited on Tuesday by FT Alphaville:
The table is for January 2007 to May 2008 (Period 1 = January – August 2007, Period 2 = August 2007 – April 2008, Period 3 = April 2008 – May 2008). It shows individual Libor quotes from the then-16 banks sitting on the Libor-setting panel.
Specifically, it shows (a) how often each bank joined the ‘deciding group’ for Libor-setting, (b) how often each submitted a quote higher than the deciding set, (c) how often each submitted a lower quote, and (d) how often each submitted a quote that was less than or equal to the median quote on each day.
Now the new inquiry covers a “2006 to 2008″ period, so the above is incomplete.
And it’s possible that bigger banks — like, say, Bank of America — were getting ‘volume discounts’ enabling them to borrow at lower rates than smaller banks like Barclays.
But still. According to that data, Barclays was at the higher end of quotes.
Intriguing, no?
Related links:
Libor – a question of ethics - Lex
From the Libor file - FT Alphaville