Floyd Norris of The New York Times wrote an interesting column on Libor titled “Finding A Rate That’s Fairer Than Libor.”
Norris cites that LIBOR was originally intended as a virtually risk-free private sector interest rate. But “an accurate Libor, from 2007 on, would have reflected the banks’ poorer credit, and would therefore no longer be such a risk-free rate.”
Norris also highlights the different tracks that British and European regulators are taking versus the U.S. Britain and the European Commission are determined to keep LIBOR and think that they can save it with better governance rules. They have also warned banks not to leave in the cases where banks have resigned from the panels that determine LIBOR.
Gary Gensler of the CFTC argues that there was very little unsecured interbank trading going on and would like to develop an alternative benchmark rate. One rate would be based on the fed funds rate – the rate at which the Federal Reserve lends to banks. The second rate that Gensler proposes would be based on rates charged on secured loans.
Norris is skeptical of the way that Gensler wants to gradually phase in an alternative rate but concludes that in the end any replacement to LIBOR should be based on a rate whose meaning will not change over time and says that secured loans make the most sense.
An approach by Richard Sandor (and was discussed at a CFS event last November) proposes moving LIBOR to a market-based, exchange-traded system which would be regulated and transparent. A write-up of his proposed solution can be found here.
Where Wheatley wants proof of actual transactions between banks, Sandor seems to be creating a true interbank market. Sandor’s proposal has the added advantage of offering real time information on the market as opposed to Wheatley’s three month delay. Whether the solution is by creating a true interbank market or basing the benchmark on an existing market, any step towards real time transparency and genuine transactions would be an improvement.