Hmm, something about Libor

This doesn\’t sound quite right to me.

What that meant was that even though Libor may have been, for example 2pc, the real Libor rate the bank was paying was more like 5pc or 6pc. So in fact, we needed to be lending money at Libor plus 3pc or 4pc just to break even. That is what we were telling clients.

I agree that Libor might have been around that, yes. But it\’s also true that there wasn\’t really a Libor market at that time. Banks pretty much were not lending to each other.

What was happening was that excess would be deposited at the Bank of England and then required amounts were being borrowed from the BoE. Effectively, the BoE was insuring the counter party risk for everyone.

And the actual rates at which banks were borrowing was a great deal lower than the unmanipulated Libor.

Sure, I could be completely wrong here, wouldn\’t be the first time it has happened. But I\’m not convinced by this story, not at all.

2 thoughts on “Hmm, something about Libor”

  1. Umm, depends what term. BoE overnight rates are fairly penal. 90 days of that would take you well north of what was being reported as 3m LIBOR at the time.

    But your underlying point is correct – interbank rates were in effect infinity at the time. However, the rules of LIBOR require banks to report borrowing rates assuming a liquid market. Therefore, every single bank was taking a punt. And the BoE/FSA knew this. To be having a pop at Barclays now for it is disgraceful, and nothing more or less than base politics. Cui bono ?

    The trader stuff on the other hand is fair game, even if as you say, you probably wouldn’t get more than a basis point for a day or two.

    I don’t buy the market impact stuff – the banks do mostly trade with each other after all. If Trader A at Bank B wants Libor up, it’s pretty safe to assume that Trader C at Bank D will want it down. Net result zero.

  2. “Net result zero.”

    Over a longer term, I’d also expect traders would be buying and selling, wanting rates both up and down at different times, meaning it probably had no bad effect for people who remained in the market long enough.

    “To be having a pop at Barclays …”

    It seems to be prompted by those “big boy” e-mails, which certainly had a conspiratorial sound to them, certainly suggesting private advantage, unlike your more straightforward explanation. I wonder, however, how much that self-congratulatory tone in the e-mails was justified (ie, whether they really were having a significant influence). It would depend on the details of the set size, how the calculation dealt with outliers (or in this case liars), and how many in the set were trying to manipulate the outcome.

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