Libor fixing is a horrendous own goal by the City that hands the EU the reason it needs to regulate the finance business out of London and across to Paris and Frankfurt. Listening to the Question Time discussion yesterday it was obvious 4 of the panelists did not understand how Libor rates are calculated. The one who did, Terry Smith wisely kept stumm. There is no point in trying to debate with the ignorant.
Libor rates are set by a panel of 16 banks who supply rates to the BBA at which they will lend to unsecured to other banks in size, say £500mn. The top and bottom 4 rates are discarded and the average of the middle 8 rates published as the Libor rate for that currency for tenors ranging from over night to one year. Sound fair?
The snags are that this is an unweighted average of indicative rates many from small banks who only lend in small amounts. These small fry are easy for the big boys to fix to get rates set which generate the highest profit over all the big boy's positions in various instruments they trade in eg swaps. Most banks in the City were therefore involved but the big boys made the big bucks out of rate fixing..
When I was doing MPC briefings I never used Libor. I used OIS swap rates. The OIS is a weighted average of the actual traded rates between the roughly 6 biggest banks operating on the London money markets.
Listening to Mervyn King tonight I doubt he even noticed. What went wrong with the banks occurred on his watch. His comments on the extending time frame to fix the crisis I found staggering. When Lehmans went belly up I was asked by various people how long the crisis would last. I replied that the historic average to recover from bank crises was 14 years. I find it incredible King was unaware of this simple and well known statistic. He wanted a second term as Governor however.
The EU is going to take over all control of banking regulation and this Libor fiasco gives them carte blanche to screw the City of London into the ground and they will do it.
King's comments on the RBS IT screw up are equally incredible. I have one word to say to King, Globus.