While the media has been focused on the LIBOR setting
scandal, no one seems to be asking the question: why would banks want to
contribute their LIBOR numbers at all? If you run a bank you have to pay your
treasurer to make up a bunch of numbers every day and send them out to be
scrutinized. Yes, it's multiple numbers - by currency, by maturity. The media,
the regulators, and clients will all read your contributions and compare them
to other banks. Chances are that once in a while your numbers will be
considerably higher or lower than the average and you will be accused of
wrongdoing. It's just the law of random numbers - sooner or later you'll be on
the tail of the distribution.
Of course your treasurer can't be bothered with making up
numbers daily, so she will delegate it to some junior folks. And you can only
hope those junior employees don't have too many persuasive friends on the
trading floor trading basis swaps. This is a serous headache. Most businesses
want to get paid for their headaches. But LIBOR/EURIBOR is charity work - banks
do it for free to get their name on the British Bankers Association (BBA) or
the European Banking Federation (EBF) list. Makes them feel important. Tons of
downside risk with no upside opportunity.
It is therefore likely that many banks will simply pull out
of this exciting venture going forward, which could turn out to be a big
embarrassment….
Read all about it at http://soberlook.com/2012/08/brilliant-ideas-to-fix-libor-from-fsa.html
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