The CB has since the establishment and until the CB’s exit April 4th 2011 collected, calculated and published CIBOR. The CB has also been an observer in the CIBOR-committee.
The control procedures insured that the technical fixing procedures were followed, among those a due timely update. Furthermore the CB reacted to potentially operational errors in the reports. The CB contacted the reporting bank, if the bid was a certain number of basis points from the pre-estimated interest fixing. Method and limit for when a reporting bank should be contacted was determined by the CIBOR-committee. If the bank insisted on the report, it entered the calculation.
The CIBOR-committee had (and has) the overall responsibility for the CIBOR. The CIBOR-committee is appointed by board of the Bankers Association.
The agreement states that ”the Central Bank fixes the reference interest rates, as long as the CB finds the quality of the rates adequate”.
Adequate quality means among other things a sufficient number of banks representing a decisive part of the market, that the reference interest exhibits a correct picture of the level of the relevant market rates, and the technical reporting was in time and correct.
Comment: So much for the responsibility – the CB is not letting the banks take the CB hostage. Now to the more serious part:
The limited revenue in the unsecured money market means a smaller trade basis to fix the CIBOR. Normally that is not a great problem, as the depth of the market behind CIBOR and other reference interest rates is limited, because the span to other money market rates is limited and relatively stable.
The span between CIBOR and the secured 3 month interest rates were in a period from autumn 2009 to the beginning of 2011 over the comparable span in other countries.
Comment: So whatever it is – it is a homegrown variety of the scandal.
Considering the higher span between the secured and unsecured interest rates in Denmark relative to foreign countries and the turnover in the market for unsecured loans was limited there was a continuous dialogue between the CB and the CIBOR bidders and the Bank Association as to the possible explanations of the higher span between the unsecured and secured interest rates in Denmark relative to abroad. This discussion primarily took place in the CIBOR-committee. In the CB’s evaluation this dialogue did not lead to a clarification.
The CB initiated in January 2010 an investigation of the money market for DKK.
As there continued to be – in the CB perception – an inexplicable difference in the deviation of the unsecured and the secured rate, and the market turnover continued to be very limited the CB was in no position to evaluate the quality of CIBOR. The CB notified in October 2010 the Bank Association that the CB would terminate collecting, calculating and publishing CIBOR and cede the role as an observer in the CIBOR-committee.
The CB leaving the CIBOR was at the same time a harmonising to international market standards, where quoted reference interest rates are done outside the CB. The CB had no documentation to conclude whether the CIBOR rates were correct – or that they weren’t.
The CB briefed the Competition- and Consumer Agency on the basis for the CB would cease to collect, calculate and publish the CIBOR. The background for the briefing was that one possible explanation for the larger span in Denmark could be a violation of the competition regulation.
The emphasis in bold is mine. The language might not be Nobel-price material; but it is deliberate and some of the clumsiness has been left as they also stand out in the original.
A clearer denunciation is rarely seen and it will be hard to establish cooperation in good faith between the CB and the banks – and the blame is squarely fixed on the banks. More than one bridge has been crossed – and put on fire.
The briefing is to the Consumer Agency is indicative of what legislation might have been violated, and the Consumer Agency is the appropriate authority for initiating possible prosecution. This is not a technical detail:
As the trade volume in CIBOR – in the relevant period – has been limited, the actual loss will be hard to determine. The Consumer Agency however is supposed to evaluate the damage done by unfair trade – and there are entities that have suffered a loss as loan (and variable interest real estate mortgage) interest rates have been agreed upon on the explicit basis of the CIBOR interest rate.