LIBOR: The Final Nail in the Coffin?

8 08 2018

Strong conflict can be observed in the prediction made by Dixit Johsi, who thinks that eliminating the use of LIBOR from the global financial system may present a Herculean task that could be “bigger than Brexit”, and the view espoused by FCA’s boss Andrew Bailey this July in Interest rate benchmark reform: transition to a world without LIBOR who is adamant that the use of the discredited rate must end by 2021. In an earlier speech on the future of LIBOR last July, Bailey stressed the need to transition away from LIBOR and the importance of doing so has not changed. However, Johsi, who is the group treasurer of Deutsche Bank and is also a board member of the International Swaps and Derivatives Association, is of the view that ending the use of LIBOR is a unenviable “mammoth task” which is “bigger than Brexit” on the overall scale of things. In his  speech Bailey reiterated the notorious status that LIBOR had attained after the global financial crisis (GFC) prior to which no one knew of its significance in the global marketplace. “Before then it was largely taken for granted, part of the financial landscape,” it how Bailey put it while stressing that the FCA has regulated LIBOR since April 2013 and that significant improvements have been made in its submission and administration. He said that the reforms of recent years had ensured that no further illegality took place but it was equally Bailey’s position that LIBOR must be terminated in its present form because the absence of active underlying markets raises a serious question about the sustainability of the LIBOR benchmarks that are based upon these markets.

But since “LIBOR is a public good” regulators were eager to protect the the interests of all involved by sustaining the current arrangements until such time as alternatives are available and transition arrangements are sufficiently well advanced. A proxy LIBOR was discussed.  Yet despite the need for a frictionless transition, Bailey is now saying that the time has come to put an end to the use of LIBOR and he therefore stressed that firms should not see phasing out LIBOR as a “black swan” event or a measure of last resort because it is not a “remote probability” and the benchmark’s termination is inevitable. He is pleased with the efforts made to change things thus far but he is not happy about the pace of the transition. The FCA is clear that ensuring that the transition from LIBOR to alternative interest rate benchmarks is orderly will contribute to financial stability and that “misplaced confidence in LIBOR’s survival will do the opposite, by discouraging transition.” Alternatives to LIBOR in the form of SOFR, SONIA, SARON and TONA are already operating globally. The Bank of England has started to publish a reformed and strengthened SONIA. Bailey informed us that it is now supported by an average of 370 transactions per day, compared with 80 before the reform. Read the rest of this entry »





King and Country: Reflections on the Costs of Market Misconduct

1 04 2016

Read as updated SSRN paper with reference to the Panama Papers. Because of the Budget 2016, the chancellor has been accused of “looking more like Gordon Brown as a purveyor of gimmicks.” In difficult times when calls for his scalp over the row regarding the budget seemed to have eclipsed everything else, the rare bit of good news for George Osborne is that he can use the opportunity provided by the threat of Brexit – “a leap in the dark” which may cost the UK £100 billion or 5 per cent of GDP and 950,000 jobs by 2020 – to camouflage and obfuscate the real problems of conduct in the world of economics and finance. On the other hand, in an important interview with Charles Moore the former Bank of England governor Mervyn King showed hallmark signs of euroscepticism and said the people need to make up their own minds about the upcoming referendum. King also warned that lenders have not stopped taking excessive risks with savers’ money and the result is “bankers have not learnt the lessons of the Great Crash”. Unsurprisingly, in his somewhat controversial new book The End of Alchemy he makes the case against financial sorcery by arguing that it must be squeezed out of the world’s banking system. Perhaps, such failings are amplified further because “financial crises are a fact of life” and we are “moving into a rerun of the credit crunch”. Indeed, Lord King calls banks “the Achilles heel of capitalism.”

Below I sketch important/emerging issues in the intersecting themes of economics, law and misconduct as seen in the media, especially through the lens of “conduct costs” – some other themes are also explored. Mentioning Walter Bagehot and his classic text Lombard Street, which argued that the BoE should provide short-term financial support in times of crisis, King advises us that the old “lender of last resort” model (LOLR) is in need of revision because “banking has changed almost out of recognition since Bagehot’s time.” The former governor argues that the time has come to replace LOLR with the pawnbroker for all seasons (PFAS) system. For him, it is time for financial institutions to drop LOLR and embrace PFAS and be prepared to advance funds to just about anyone who has sufficient collateral. “The essential problem with the traditional LOLR,” argues King “is that in the presence of alchemy, the only way to provide sufficient liquidity in a crisis is to lend against bad collateral – at inadequate haircuts and low or zero penalty rates.” Read the rest of this entry »





Notable Economic Forecasts

19 11 2015

The UK has recently been dubbed by the Legatum Institute as “the third cheapest place in the world to start a business, far cheaper than the US or Germany.” The strength of the UK economy, which makes it one of the world’s most prosperous countries, is the underlying reason for creating successful businesses and opportunities for those seeking entrepreneurial roles. The Legatum Institute 2015 Prosperity Index, which is a league table ranking countries on the basis of economic success and a series of wellbeing indicators, ranks the UK (behind Germany) as the fifteenth most prosperous country in the world. (Norway has topped the ranking for the seventh consecutive year as the world’s most prosperous country.) However, as observed on this blog, misconduct in financial services is spiralling and no end to the conundrum appears to be in sight. In relation to trade, contrary to the findings of the Legatum Institute, the Institute of Chartered Accountants in England and Wales (ICAEW) has also found that business confidence in the UK is weakening and that investment is muted and exports are low.

For example, the Q4 2015 ICAEW/Grant Thornton UK Business Confidence Monitor results argue that though “still firmly in positive territory … the post-election honeymoon maybe over”. Exports and manufacturing have not been rebalanced which means there is continued reliance on domestic demand. In addition to the fall in business confidence after the post-election bounce, the Q4 2015 ICAEW/Grant Thornton report further found that exports are sliding below domestic sales, firms are restricting their budgets for R&D because they lack long-run confidence and skills shortages are rising – albeit wages are increasing steadily. The upshot is that business confidence is at its lowest level since 2013. Confidence in the services sector remains positive but is declining in the production sector. Read the rest of this entry »





Flaux J Vindicated: Court of Appeal on Amendment, Implied Representations and the Efficiency of LIBOR

20 01 2014

Graiseley Properties Ltd & Ors v Barclays Bank Plc & Ors [2013] EWCA Civ 1372

The appeals from the High Court in Graiseley Properties Ltd & Ors v Barclays Bank Plc [2012] EWHC 3093 (Comm) (Flaux J, see post here) and Deutsche Bank AG & Ors v Unitech Global Ltd & Ors [2013] EWHC 471 (Comm) (Cooke J, see post here) were decided by the Court of Appeal (Longmore & Underhill LJJ, Sir Bernard Rix) in Graiseley Properties Ltd & Ors v Barclays Bank Plc & Ors [2013] EWCA Civ 1372. In a robust but concise judgment, the Court unanimously allowed the appeal from Cooke J and dismissed the appeal from Flaux J.

The critical question before the Court of Appeal was, in relation to the two cases mentioned above in which banks were seeking to recover sums due under loan or swap agreements, whether the borrowers should be allowed to amend their pleadings in order to allege that the banks had made implied representations in respect of the efficiency of or the non-manipulation of the London Interbank Offered Rate (LIBOR). Read the rest of this entry »





Roger McCormick: Book Review: Market-Based Banking and the International Financial Crisis, edited by Iain Hardie and David Howarth

19 01 2014

1df0f60Economics and political economy lack the analytical tools to explain the differing impact of the recent international financial crisis that erupted in 2007 on developed economies. The principal aim of this edited volume is to offer a ‘market-based banking’ framework which transcends the dominant dichotomous understanding of financial systems in terms of credit-based and capital-based. Market-Based Banking & the International Financial Crisis, Iain Hardie and David Howarth (eds.), Oxford University Press, August 2013, attempts to provide a framework that is more reflective of banking in modern financial systems; one that provides a more successful explanation of the differential impact of the recent financial crisis. Reviewed by Roger McCormick.

This book is based on a collection of papers written by political economists and derived from three workshops held in the period 2009-2012 in Edinburgh and Victoria, British Columbia. (The Editors both have connections with the University of Edinburgh). The financial systems of, and the experience of the Crisis in, eleven different countries are considered: UK, USA, Canada, Belgium, France, Germany, Italy, Spain, Greece, Holland and Japan. Read the rest of this entry »





Wheatley Review on Resetting Libor

30 09 2012

On 28 September 2012, the Wheatley Review of Libor: final report was published and a ten-point plan to reform the ailing benchmark is on the cards. See earlier posts on Libor on this blog here and here. Moreover, responses to the initial discussion paper are available here, here and here. The treasury has explained that the government is studying the review’s recommendations and intends to respond to the review by introducing “any necessary legislation” in the Financial Services Bill currently under consideration by the House of Lords.

In his speech Pushing the reset button on Libor, Martin Wheatley – Managing Director of the Financial Services Authority (“FSA”) and Chief Executive-designate of the Financial Conduct Authority – agreed with the Economist’s view that Libor is simply the most important figure in global finance: its centrality in banking law cannot be overstated.

The threefold terms of reference for the review included (1) reforming the current framework for setting and governing Libor (2) determining the adequacy and scope of sanctions to appropriately tackle Libor abuse and (3) whether similar considerations apply with respect to other price-setting mechanisms in financial markets. Read the rest of this entry »





Treasury Committee’s Views on Libor

18 08 2012

London Interbank Offered Rate (Libor) is an average interest rate set by the British Bankers’ Association (BBA). Libor, a benchmark interest rate which the international financial system is wholly dependent, is calculated on the basis of submissions of interest rates by major banks in London and – underpinning approximately US $350 trillion in derivatives – serves as the foundation of global banking and finance. Traders claim that Libor has been manipulated since 1991. Of late, the issue has become a huge scandal because banks either understated or exaggerated (“rigged”) Libor to cast false impressions regarding their creditworthiness or to profit from trades.

The problem was that, rather than overstating or understating figures, banks were required to submit the real/actual rates they were paying or would genuinely pay for borrowing from other banks. Ultimately, an attempt to manipulate Libor violates US law as the rate is widely used in American derivative markets. Moreover, adverse consequences in “fixing” Libor exist for consumers and international markets alike. From Britain’s position, in an economically deteriorating environment, the embarrassment could not have been more unfortunate because Libor is a “London” based exchange rate. Read the rest of this entry »