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What if banks boycott Libor?
(The authors are Reuters Breakingviews columnists. The opinions expressed are their own)
By Peter Thal Larsen and Wayne Arnold
LONDON/SINGAPORE, July 17 (Reuters Breakingviews) - What would happen if banks abandoned Libor? The Barclays (BARC.L) scandal has prompted lenders to rethink their role in setting interest rates. A mass boycott of the London Interbank Offered Rate could throw markets into a tailspin. Regulators need to decide urgently how the benchmark for hundreds of trillions of dollars of contracts should be reformed.
No banks have withdrawn from Libor in the wake of the political firestorm that followed Barclays’ admission of rate-rigging. But a growing number of institutions are pulling out of arrangements used to determine lesser-known benchmark rates from Dubai to Tokyo. And Paul Tucker, the Bank of England’s deputy governor, last week suggested regulators were making contingency plans to deal with a Libor boycott.
There’s nothing to stop banks from pulling out. Libor is fixed each day when banks submit the rates at which they would be able to borrow for a range of currencies and maturities. Participation in the panels is voluntary, and changes are not unusual. West LB, the German lender that is undergoing a severe restructuring, recently withdrew from the panel that sets dollar Libor rates.
Moreover, the $453 million fine imposed on Barclays for rigging Libor shows involvement in setting the rates is anything but risk-free. Dozens of other banks are still under investigation. And the U.S. Department of Justice’s launch of criminal investigations suggests banks and their employees could yet face even tougher sanctions.
Unlike Libor, rates like Tokyo’s interbank rate, Tibor, Singapore’s Sibor and Dubai’s Eibor are unlikely to hurt markets or the banks that turn their backs on them. With the downside so low and the legal liability soaring, shunning these “little” Libors is a no-brainer. Besides, banks may have sound business reasons for pulling out: RBS (RBS.L) , for example, is scaling back its operations in Asia.
A Libor boycott could be disastrous. Despite its flaws, the rate is crucial for pricing hundreds of trillions of dollars of loans and derivatives. Avoiding market disruption may be sufficient to prompt banks to overcome their legal concerns and stick with the Libor-setting process for now. But regulators can help by clearly setting out how the Libor benchmark can be reformed or replaced. They need to get on with it.
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- Royal Bank of Scotland on July 16 pulled out of a Singapore panel setting interbank lending rates, and has already exited similar panels in Tokyo and Hong Kong, according to the Financial Times. Barclays has withdrawn from the rate-setting panel for interbank lending in the United Arab Emirates.
- Paul Tucker, deputy governor of the Bank of England, said on July 9 that the central bank was thinking about contingency plans if banks withdrew from panels that are used to set the London Interbank Offered Rate (Libor). “What happens if people just won’t participate in Libor and all of these contracts get priced the following days?” he told parliamentarians.
- An investigation into manipulation of London interbank lending rates started late last year and seized headlines last month when Barclays paid a $453 million fine to settle with U.S. and UK regulators over its role in rate fixing. More than a dozen other banks are involved in the probe, which has thrown the spotlight on the discredited process for setting the rates that are the basis for hundreds of trillions worth of financial contracts.
- Reuters: Banks reconsider rate panels, RBS pulls out [ID:nL4E8IG3VN]
Low conviction [ID:nL2E8IG2OL]
Not looking good [ID:nL2E8ID68T]
Liborious task [ID:nL2E8ICAIF] - For previous columns by the author, Reuters customers can click on [LARSEN/] and [ARNOLD/]
(editing by Hugo Dixon and David Evans)
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