Institute for Financial Transparency

Shining a light on the opaque corners of finance


Fixing Libor simpler and easier than replacing it

The financial crisis revealed bankers were rigging Libor for personal profit.

Since then, regulators have been searching for a solution to either replace or fix this easily manipulated rate.  Naturally, regulators have relied on bankers to help them find the solution.

Finally, it appears a regulator and banker friendly solution has been found.

The Alternative Reference Rates Committee, made up of Wall Street banks and regulators, decided to use a rate based on the cost of overnight loans that use U.S. government debt as collateral.

It is regulator friendly as they will be involved in setting the rate.

The Federal Reserve Bank of New York plans to publish daily what it calls a broad Treasury repo rate, in cooperation with the U.S. Treasury Department’s Office of Financial Research, starting in the first half of 2018.

Why is the new rate better than the existing Libor rate?

One big reason is that it will reflect real, not hypothetical, transactions and thus may be impossible to manipulate.

This answer raises an interesting question: why can’t Libor be based off of actual transactions entered into by the banks?  After all, if banks provided transparency and disclosed all their exposure details, including their funding transactions, every market participant would have access to the data needed to calculate Libor.

Of course, this wouldn’t be a banker or regulator friendly solution as transparency would subject the bankers and regulators to market discipline.