Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Demise Of Libor Is Part Of A Massive Global Trend That Many Overlook

Interest-Rates / Global Financial System Aug 31, 2017 - 03:36 PM GMT

By: John_Mauldin

Interest-Rates

BY XANDER SNYDER : For decades, the public put its trust in technocrats.

The thinking was that the economy and politics had become too complex for ordinary citizens to understand. And that the best way to handle it was to allow the experts to take over.

They were perceived to be skillful and knowledgeable enough to manage economically and politically important institutions (including banks).

The events of 2008–2009 shattered that belief.


The next casualty is Libor—the London Interbank Offer Rate.

Libor in a Nutshell

The British Bankers’ Association introduced Libor in 1986 as a measure of wholesale interbank lending rates.

Libor is essentially set by “expert judgment.” Each day, a panel of banks submits its estimated cost of lending to another bank for various time periods to the ICE Benchmark Administration.

What this means in practice is that only some of the bank submissions are based on real underlying transactions, and the rest are left up to traders’ estimates. In 2015, for example, about 70% of the submissions were experts’ guesses. 

Two Scandals That Destroyed Libor’s Credibility

Two developments since the crisis of 2008–2009 motivated the Financial Conduct Authority to end Libor.

The first was a scandal in 2014 in which traders at several large banks were found to be conspiring to manipulate Libor rates to benefit their own trading positions… and so their bonuses.

The second is the decline in wholesale interbank lending in the post-crisis years. Andrew Bailey, the chief executive of the FCA, has perhaps focused on the second cause in his explanation of why Libor must be abandoned.

According to the FCA, with fewer real transactions on which to base the benchmark rate, Libor becomes more and more dependent on expert guidance—that is, submissions by bank managers—which isn’t sustainable in the long run.

With increased regulation following the 2014 scandal, there is a risk that banks that currently submit Libor rates will choose to leave the panel, making the benchmark rate more dependent on the estimates of fewer financial entities.

What Will Replace Libor?

There’s some uncertainty about what will replace Libor, since several potential alternative rates have been proposed.

In the United States, a panel of 15 banks voted in July to support a rate based on overnight secured lending against US Treasuries. The idea is that this new rate would be based on real transactions between banks and other private entities, not the guesswork of traders trying to bump their annual bonuses.

But Libor is a rate for unsecured lending, which means that the new rate would likely be lower than Libor. For loans that are based on Libor or comparable indexes, this presents a problem for the banks: If they decide to switch to this new secured rate for existing contracts, their loans will become less profitable.

This is just one possible replacement, but the inverse could also become true—costs could go up for borrowers of all types, from homeowners to students to businesses.

The Demise of Libor Is Part of a Bigger Trend

The financial concerns about Libor are legitimate. But this sort of reform wouldn’t have occurred without scandals. And these scandals would not have come to light if it were not for the investigation into bank lending and trading practices that began after the 2008–2009 financial crisis.

The crisis killed the idea that “experts” can manage the complex systems with which they have been entrusted. This is about more than the financial system.

There is growing mistrust of experts.

The demise of Libor is just one example of the consequences stemming from this lack of faith.

A split has formed between people who generally trust the counsel of technocrats and those who question their intent… or at least their competency. That split is becoming increasingly visible in the West.

In Europe, this has taken the form of distrust of EU policies and national politicians who advocate for them. In the US, it has pitted those with enduring confidence in elites against those suspicious of them.

Divisions will only get worse as governing institutions fall victim to their own complexities and fail to provide the services their constituents want them to. There will be more financial (and other) reforms that try to respond to this growing unease.

But as with most reforms, there will be winners and losers.

Grab George Friedman's Exclusive eBook, The World Explained in Maps

The World Explained in Maps reveals the panorama of geopolitical landscapes influencing today's governments and global financial systems. Don't miss this chance to prepare for the year ahead with the straight facts about every major country’s and region's current geopolitical climate. You won't find political rhetoric or media hype here.

The World Explained in Maps is an essential guide for every investor as 2017 takes shape. Get your copy now—free!

John Mauldin Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in