Sunday, Jun 21, 2009
The revolution will be hyperlinked.
Zero Hedge: On The Uselessness Of LIBOR
Most financial experts are aware that the only reason the economy has not yet collapsed entirely, is due to the trillions in governmental safeguards and industrial subsidies.
Curiously, the LIBOR debate is moving to a more econometrically-focused audience and has led none other than the San Francisco Federal Reserve to come out and indicate that LIBOR is essentially flawed as a metric, as it now reflects not so much the risk in the system, but the guarantees by the US government itself.
Posted by devo @ 10:18 PM (339 views) Add Comment
1 Comment
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1. 51ck-6-51x said...
LIBOR does, indeed, paint a poor picture for many of it's uses (this does not mean LIBOR is useless, just that is is misused). However I do not agree with the reasoning of this article.
"In all cases TARP banks have been offering LIBOR loans below the average of Japanese banks."
- 1. When a bank submits to LIBOR, they are submitting:
the rate they think they could get offered in the market place
i.e. Not what they are offering [ or have offered or will offer ] to someone else, since it depends upon the counterparty. :
LIBOR is a benchmark not a tradeable rate, hence one cannot draw the conclusion above from the rates, however...
- 2. Of course it will be cheaper for a TARP bank to borrow. The "politicising" was done by the TARP program itself, not by the interbank lending market or the way LIBOR is derived. TARP gave extra backing to those banks with funds, and the market thinks the U.S. government is the ultimate backstop [ after all if they default, what happens to the rest of the financial world?! ].
"Currently there is no good alternative to LIBOR"
- Yes & no - this depends upon use, but this needs to be addressed.
- For the problem in question, and for Euros, what about EURIBOR? EURIBOR polls the rates a bank believes a prime bank ( i.e. another bank ) could get offered in the marketplace, this removes the stickiness seen in LIBOR dring times of tighter credit ( this may not be good for some applications - but a moving average EURIBOR could be useful here ).
- For other currencies one could infer a rate from EURIBOR ( although this has other problems ).
In conclusion the BBA should consider some new measures.
The technical features of the newer EURIBOR are superior, maybe they should consider use of this kind of method for the new measures.
The needs specific to products should be thought through carefully.