Friday, February 8, 2013

Ultra transparency solves problem of enough banks on Libor-Euribor panels

With their ability to profit from manipulating benchmark interest rates like Libor and Euribor temporarily gone, Bloomberg reports that banks are dropping off the rate setting panels.

Naturally, the reaction of the regulators is to think about forcing some of the banks to stay on or rejoin so that the panel is a representative sample of banks.

Of course, by requiring the banks to provide ultra transparency, both the problem of having enough banks for the panel as well as the banks manipulating Libor/Euribor/Tibor goes away.

When all banks have to disclose all their transactions in the unsecured interbank lending market, then market participants can choose any combination of banks, from some to all, to include in the calculation of the benchmark interest rate.

Europe’s top financial regulator said he’s considering forcing banks to participate in setting Libor and Euribor rates after lenders including Citigroup Inc. and HSBC Holdings Plc pulled out of some panels amid the rigging scandal. 
Regulators will draw up a list of lenders that should be forced to participate in the setting of interbank rates “in view of their involvement” in those markets, Michel Barnier, the EU’s financial services chief, said in an e-mailed statement today. 
“Any banks considering withdrawing from the contributing panels should therefore take into account that they may be required to rejoin,” Barnier said. 
The plans to force banks to submit data for rate setting will be included in draft legislation on benchmark setting that the European Commission will present in the first half of this year.... 
“The Eurosystem strongly encourages banks to remain in, or join, the Euribor panel to prevent potential disruptions to the functioning of the financial markets while the regulatory framework is being refined,” the ECB said in a statement on its website.
U.K. Regulator 
“For such rates to remain representative, it is essential that there is an appropriate level of bank participation in the respective panels,” the Frankfurt-based ECB said. 
Martin Wheatley, the managing director of the U.K. Financial Services Authority, called last year for oversight of Libor to be handed to the U.K.’s financial regulator, and dozens of the currencies and maturities that make up the benchmark axed, under proposals designed to revive confidence in the rate....
Wheatley's recommendation are a classic example of substituting the combination of complex rules and regulatory oversight for the combination of transparency and market discipline and making the financial system worse off.
Since July, as many as ten banks have dropped out of the setting of the Eurepo Index, which is also managed by Euribor- EBF. These lenders include Societe Generale SA, UBS AG and HSBC. Euribor is derived from a daily survey of interbank lending rates conducted for Euribor-EBF by Thomson Reuters Corp.

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