Everyone is talking about the scandal of the manipulation of the Libor but I have not found in the Italian press any complete and correct description of what happened, except for the one published a few weeks ago in L'Espresso for which Zingales had to be bothered. Searching Wikipedia for the definition of Libor, I discover with disappointment that it is incorrect "... Libor is the European reference rate at which banks lend money to each other, often overnight (in overnight batches), after the markets close..." It is not so.
What is Libor?
The Libor (London Interbank Offered Rate) is an interest rate that is set for 10 currencies (euro, US dollar, yen, pound sterling, Swiss franc, Canadian dollar, Australian dollar, Danish krone, Norwegian krone and New Zealand dollar) and 15 different maturities (from one day to 12 months) but it is not the rate, or rather it is no longer the rate at which the major banks actually lend money to each other on the market but a "reference" rate, to which many derivative instruments are anchored and to which mortgages and loans are indexed in the main countries. The rate is set through an official survey conducted in the morning around 11:00 (precisely between 11:00 and 11:10) through which a certain number of banks are asked to answer the following question: "At what rate would you be able to borrow funds if you had to ask and then would you accept offers on the interbank market for a significant amount before 11:00 in the morning?”
From these answers (the reference banks, depending on the different currencies, can be between 8 and 18), the highest and the lowest are discarded and an average is made between the central values, the result of which is the official Libor rate . When the result has been calculated, it is made public and it is also possible to view the banks that have participated and the rate that each has expressed. The rate is expressed on an annualized basis. The agent for the calculation is Thompson Reuters and each of the participating banks has an automatic application at its disposal through which it enters the rate, without being able to see the rates chosen by the other reference banks. The key point is that the Libor (as well as the Euribor) is NOT anymore an interest rate that closely follows the conditions of the real transactions carried out on the market. It's just a theoretical rate, used as a benchmark for derivative transactions and a great many mortgages and loans to customers by banks. This makes a big difference.
Before the Lehman Brothers bubo broke out, Libor rates were very close to actually traded rates. After the outbreak of the crisis, the two rates began to register significant differences, a "spread" of no small importance. This is the consequence of the sudden crisis of confidence that hit the banks. As market participants realized that bank failures could happen more easily than they expected, interbank deposits ceased to circulate as fluidly as in the past and this led to a sudden increase in their cost and a rarefaction of exchanges. Today the interbank deposit market is reduced to a minimum and the banks are making titanic efforts to achieve a state of "virtual autarky".
So what are the issues related to the Libor rate and its fixing?
First of all, the auction mechanism can be decidedly improved: there are few "leading banks" and the publication of the names and levels expressed facilitates collusive practices. Even more important is the question of the significance of the Libor rate:
– Banks have no obligation to close actual transactions at the expressed rate.
– There is no reliable data on the levels at which banks actually lend to each other.
– After the Lehman crisis, the very concept of "unsecured loan" expressed by Libor has lost its meaning because very few banks today lend without guarantees and, if they do, they exchange limited sums. Banks in Europe, as we well know, prefer to deposit funds in the vaults of the European Central Bank, at a lower remuneration than the market one.
Just to provide an example, the Italian and Spanish banks express the theoretical level of Euribor (fixed with the same mechanism as Libor, but by the European Banking Federation rather than by the British Banking Association) to which they think they can borrow funds in one year around 1%. At the same time, the rates at which Spain and Italy, understood as States, finance themselves for one year is over 4%!
Why was the Libor manipulated?
A simple and logical reasoning leads to think that the major banks manipulated rates downwards because they wanted, in the liquidity crisis resulting from the bankruptcy of Lehman, show that they are "more solid" than they actually were, in a market where fear led to raising the price of borrowed funds. A more subtle and "malignant" explanation could be the fact that the Libor is the reference parameter to which the majority of derivative contracts are linked. If positions in these contracts amount to several billion dollars or a different currency (not science fiction but reality for many large global banks) when they mature, even a tiny difference in the reference rate can cause a significant gain/loss in terms of absolutes. A third hypothesis can be found in the fact that many bonds issued by these banks to finance themselves on the international capital market have coupons indexed to Libor/Euribor. A containment of the base rate would have meant a containment of the cost of financing. This theory is more difficult to prove, because it would mean that all or most of the banks involved should have had a matching interest.
What to expect?
Now the situation is complicated: Barclays has already been fined 455 million dollars because the manipulation has been proven, as well as the interference of the highest levels of the bank in the whole matter. In the USA and not only everyone is suing everyone, sometimes just to get money, sometimes for actual damages suffered. The story will be long and complicated. What is certain is that a scandal like this really was not needed at a time when trust in those who regulate banks and in the banks themselves is at an all-time low. Objectively, looking carefully at the fixing mechanism and at the discrepancies between the Libor rates and the real rates expressed by the market, which have already been highlighted several times on this blog, some doubts about the transparency of the mechanism could emerge. Furthermore, it is a rather important parameter, perhaps it would be useful greater adherence to actual market conditions.
What are the consequences for Italian savers?
What really escapes me is why in Italy a class action has been launched by citizens promoted by consumer federations which estimates the damage suffered by 3 million families (not bruscolini) at a good 2,5 billion euros. can no longer trust anything and even less the banks, but they taught me that if the rates are lower, the mortgages cost less. It would therefore seem that, for once, citizens have benefited from yet another banking scam! Looking forward of numerical clarifications on the estimates of the "damage" to Italian citizens, I await with anxiety and in good company, serious measures on global banking regulation.
