Letter to the FT: Libor suggestion doubly mistaken

Julian D. A. Wiseman

Abstract: Letter sent in response to an article in the FT on Tuesday 22^th April 2008 entitled Debate over Libor breeds a crisis of confidence, disagreeing with one of the suggestions therein.

Publication history: the FT, and here. Usual disclaimer and copyright terms apply.

Responding to the article Debate over Libor breeds a crisis of confidence published on Tuesday 22^th April 2008, the following letter was published on Saturday 26^th April 2008 under the title Libor suggestion doubly mistaken.

Sir, The FT suggests that changing the Libor rules to echo those of Euribor might alleviate some of the recent problems (“Debate over Libor breeds a crisis of confidence”, April 22). This is wrong in both principle and practice.

The British Bankers’ Association asks each contributor bank to “contribute the rate at which it could borrow funds”. Banks should know at what price they can borrow, even if an odd maturity like 10-month has not traded recently. In contrast, Euribor asks for the rate “that each panel bank believes one prime bank is quoting to another prime bank”. This is unobservable: if HSBC (for example) is lending money to Barclays, only those two know the price at which that transaction happens: a non-prime contributor bank must guess.

In practice, despite the slight differences in the rules, EUR Libor and Euribor fixings have been very similar, both during and before the recent turmoil.

Clearly there have been problems, with USD Libor fixing low and GBP Libor fixing high, but a small change in the definition of the rate to be submitted would not change the outcome.

Julian D. A. Wiseman
New York, April 2008