Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 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