The Great Debate UK
–Laurence Copeland is a professor of finance at Cardiff University Business School. The opinions expressed are his own.–
The LIBOR scandal will run and run, and it is far too soon to say where it will all end. Nonetheless, there are two conclusions that we can already draw from it.
The first is that LIBOR (and its foreign relatives, EURIBOR, NYIBOR and all the other bores) are as dead as Monty Python’s Norwegian Blue. They no longer carry any credibility as an index of bank borrowing costs and in fact they no longer represent any economically meaningful quantity at all. The world of finance is now suspended in a ridiculous state of limbo, where contracts amounting to trillions of dollars are being priced off a number which, with or without the connivance of the agencies supposed to be regulating its integrity, has been systematically manipulated for years by financial institutions which are themselves major parties to the contracts. Inevitably, the distortion intended to conceal the fragility of the banking system has ended up exposing it more brutally than ever.
The obvious thing is to replace these self-generated synthetic interest rates by something firmly grounded in reality, an index based not on the price banks say, or believe, or say they believe they would have to pay to borrow, but on the deals they actually do. Against the objection that those rates would look like the ones quoted for Greek Government debt right now, one can only say: so be it. If borrowing costs had been honestly reported all along, we might never have got in the current mess. Bank shares would have fallen far sooner, their empire-building schemes would have been stopped in their tracks and history might have been different.