There has to be a more honest and efficient way of establishing market interest rates than having banks submit – whether fraudulently or not – where they think they might be able to borrow from or lend to their competitors, and then crudely averaging the results. One answer might be to allow truly free markets to operate. Firstly, take a blind sampling of actual trades (a “mystery shopper”, if you will) drawn at random from any number of executed transactions. They could be easily anonymised to ensure confidentiality on both sides. Such sampling should also be conducted by an independent intermediary so as not to encourage gaming the system. But why will nobody dig further, and ask why the Bank of England itself should have a monopoly on fixing interest rates? It’s about time we had a proper free market in the price of money.
Tim Price is director of investment at PFP Wealth Management.
Libor shouldn’t be scrapped. In fact, it can’t be scrapped. If politicians and regulators try to step in, they will be altering contracts worth hundreds of trillions of dollars, putting the whole financial system at risk. A heavy-handed change will result in an instant and colossal redistribution of wealth from one set of contracting parties to another. The resulting systemic and legal backlash would be swift and expensive. Nobody can disagree that any criminality associated with this scandal needs decisive action; however, in an effort to be seen to be getting tough on banks, politicians and regulators must ensure that they don’t make things worse. Libor could be reformed from within. Adding more banks – Euribor has 43 versus Libor’s 16 – would be a start. For better or worse, the global financial system depends upon Libor. Regulators should leave the market to judge whether the index is still of merit.
Philip Salter is business features editor of City A.M.