Libor: Changing the frame of reference
There’s a rush to find an alternative to ‘ibors’, but with just three years to go before banks might stop submitting Libor altogether, regulators and market participants are still trying to figure out the right questions to ask.
The man who stuck the first knife into the London interbank offered rate still thinks it is better than any alternative.
It was easily manipulated. It may even be inherently fictional. But proposed alternatives to Libor, the benchmark that serves as a reference rate for some hundreds of trillions of dollars in financial instruments (estimates range from $200 trillion to $450 trillion), aren’t likely to succeed.
So says Scott Peng, the former Citigroup analyst who, just five months before the collapse of Lehman Brothers in 2008, wrote a research report entitled ‘Is Libor broken?’ that showed Libor was not accurately representing overnight unsecured bank funding costs. It helped lead to the revelation that some of the bankers submitting the daily published rate were actually manipulating it – at first to help boost fellow traders’ positions and later low balling it to make their banks look more healthy than they really were.
We know what happened next – what was once an acronym few people had heard of became a word associated worldwide with scandal. The UK’s Financial Conduct Authority announced in June last year that it would stop requiring banks to submit Libor at the end of 2021.