Libor: First change it, then render it obsolete
The CFA Institute recently interviewed 1,259 of its members from all around the world and from every aspect of the financial-services industry to ask them about Libor. And the results are clear:
Clearly no one believes that Libor makes any sense the way it’s currently set up. Libor, CFAs are agreed, should reflect actual interbank borrowing rates, not some hypothetical estimated rate at which banks think they could probably borrow if they wanted to.
What’s more, Libor submission should be a regulated activity (70% agree, 18% disagree); and the regulator should have criminal sanctions available to it (82% agree, 9% disagree).
As for the key question of what should be used as an alternative benchmark, responses varied, with no one rate in particular standing out as popular. But only 7% of respondents said that there was no alternative viable rate. Libor should be regulated, phased out, and replaced with something else.
All of which will take a little bit of time, but not a lot: less than 10% of respondents think it could take more than 3 years.
In the next year or two, we are going to see a succession of gruesome headlines around Libor manipulation: Barclays was only the first. As a result, even the big banks who contribute to Libor are likely to be quite keen to put this tarnished measure behind them. First change it, then render it obsolete. As quickly as possible. Even the professionals agree.