The big Barclay\’s Libor question

We know that they submitted false rates.

But do we actually know that Libor itself was set wrongly as a result?

I\’m not sure we do: anyone actually know?

18 thoughts on “The big Barclay\’s Libor question”

  1. Well… the implication is they did. In particular the bit about other trading desk asking for particular libor rates – they wouldn’t have asked if the libor rates were unaffected.

    In any case, “we tried to manipulate it, but didn’t really succeed” is not the best of defences!

  2. How could they *not* have?

    Assume an attempt artificially to lower rate:

    Either the Barclays submission was very low and was treated as an outlier or it wasn’t.

    If an outlier, then it took the place of a *real* outlier, which was thus wrongly included in calculation, artificially lowering the calculation.

    Similar logic applies if they were not eliminated as an outlier: their lower figure dragged the average down.

    Unless I’m completely misunderstanding how this works.

  3. There were two types of manipulation:
    1) pretending it was easier to get funding than it actually was
    2) trying to rescue individual traders.
    The effects of 2) – given many participants with opposite positions – are likely to cancel themselves out (particularly if all the banks were at it – which they seem to have been). Which leaves 1) as a potentially systemic issue – which would generally have tended to keep LIBOR lower than it otherwise would have been.

  4. The system is set up assuming each bank will bias the quotes to favour themselves (and if you miss too many times, you get kicked out).
    But being included in the index is an asset with an associated rent. Many market participants are not in the LIBOR panel, so they are potentially taken advantage off…

    The LIBOR panel itself will have a LIBOR reset risk position vs the rest of the market. This is just an opaque fee embedded in swap trading…

    I think all in all it’s a good idea to force such fees from opaque to transparent. So I think it’s a good idea to punish them…

  5. Also it’s really a matter of degree in a sense. The LIBOR panel provides a service (providing you freely information about the market conditions they observe) and they get a benefit. So a certain level of manipulation should be expected as a fair return for the information they provide. But we should still monitor and check if they abuse the position…

  6. The fixing process works by getting a number from each member of a panel and eliminating the top and bottom quarters. So one extreme vote is likely to make some difference (unless there’s a tie at the quartile) but not very much.

    However, it’s been rather well known for some time that LIBOR rates are not an honest representation of interbank borrowing rates, see for example this paper. I persuaded my then employers years ago that LIBOR is not a sound discount rate to use in derivatives pricing and risk management.

  7. Note that Libor is an average. Each fixing (by maturity and currency) is calculated by
    i) polling 16 banks
    ii) rejecting the top and bottom 4
    iii) averaging the remaining 8
    It seems that much of the manipulation should either be rejected or be cancelled out by other banks.

  8. Fred (#7), as Mr Brown said at #2, even if Barclays’ manipulated figures were rejected in your step (ii), that means that another bank’s figure that should have been rejected will have got into the average.

    So manipulation would still change the average, but not by as much as one might expect.

    The bigger effect is if all the banks are claiming lower figures then the average will be lower (which of course is good for borrowers).

  9. @Richard

    If all the banks are understating their Libor as they probably did in late 2008 to make them look better than they were then I would agree.

    Personally what I do not like here is the amateurishness of the BBA to have such an important index calculated in such a weak way. Any serious BBA should have been able to spot check fixings by requesting a bank to fulfill its quotation by saying OK – let me see you borrow at that rate in a large enough size to matter. This would have made banks wary of cheating.

  10. The FT article says “on some occasions, however, the manipulations of Barclays’ submissions affected the fixed rates”
    So mostly it made no diofference, but occasionally it did affect the rates.
    The next questions is: if other banks were also manipulating, did Barclays manipulation push declared LIBOR further from or nearer to the true rate that should have been declared?

  11. Fred (#9) has a point. According to Wikipedia, what each bank reports is “that bank’s perception of its cost of funds in the interbank market”

    I’d have thought they should be reporting their actual inter-bank borrowings over a period, with amounts borrowed, so that an actual weighted average can be obtained rather than just a “perception”.

  12. The FSA are investigating other banks too – so far HSBC and RBS are known to be under the microscope, and it is likely there will be others. There is a parallel investigation going on in Europe regarding Euribor fixing, and according to the FT (last year) also in Tokyo regarding possible Tibor fixing. It’s systematic manipulation of interest rates by the rate-setting bank to benefit their own trading at the expense of others, and it probably involves all of them. So much for Chinese walls and laws against price fixing.

  13. Irrespective of the substantial or immaterial effect of the LIBOR rigging, it is yet another sound reason for Dame Angela Knight at the BBA to be hanged, then drawn and quartered.

  14. @Dinero: I don’t imagine so – participants are included by volume. No point asking The Chicken Farmers’ Bank of Venezuela (or whoever) what they think, after all…

    What the CFTC are spitting bones about is the potential impact on the swap market, particularly (I suspect) at Futures contract settlement dates, upon which (the quarter days) so much else depends. Further, the prospect of collusion really gets their goat. They have form on this.

    Our own blessed FSA (who are spitting rage and lettuce) are probably pleased at having what they think is a scalp.

    LIBOR is rather more than a settlement price; it is a reference price for a hell of a lot more. We own money or we owe it.

    If it can be showed that interested parties were successful in their attempts to skew LIBOR (whether it worked or no) then it’s guts on the carpet time…

    I ‘ll be watching with interest…

  15. But the chance of the FSA bringing a successful prosecution is about the same as the chance of me playing the oboe at this summer’s Proms.

    Both would be difficult things to do, being attempted by people with no skill at it.

  16. If Barclays can be penalised for affecting a market price, then should responsibility also extend to governments too? Is the Euro not a huge interference in the market for money…?

Leave a Reply

Your email address will not be published. Required fields are marked *