Are CBs The Answer To The LIBOR Issue?

By Tom
Published on

Stuck with the CIBOR/LIBOR?

Christian Clausen, Chairman of the European Banking Federation (EBF). tells Berlingske (in my translation):


I think that LIBOR and CIBOR must funciton for decades into the future, as there are trillion dollar contracts globally that are fixed relative to these interbank rates.

It is unimaginable that they don’t exist; but we might have to improve the fixing process. LIBOR and CIBOR must exist and if a new reference interest rate comes it will be in addition. You can’t cut the power wires to society before some new have been dug into the ground. That would be tantamount to cutting the capital supply.


The world’s largest central banks meet in September, in order to discuss alternatives to and ”radical reforms” of the common interests; but the problems cannot be solved with a magic stroke, Clausen underlines.

”You can imagine that a new reference interest is created; but you should be aware, if it very quickly becomes very technical and complicated. It is hard to imagine that LIBOR or CIBOR would not still being reference interest rates. The major users are businesses, and there are very efficient and gigantic swap-markets  between fixed rate loans and LIBOR, and they work well. That is not the case for CITA and EONIA (Danish CB and ECB’s alternative reference interests), or other interest rates one could imagine using,” says Christian Clausen.


Christian Clausen is in his own words”distraught” over the LIBOR-scandal, and is ready to reform the system. According to Børsen.

”It is paramount that we find a way that is credible and transparent – and that the costumers can trust. We welcome any initiative for improvement,” says Christian Clausen.

He can’t guarantee that the Danish CIBOR hasn’t been manipulated.

”I don’t know if it is possible. We have not seen any indications that anything untoward has happened. But clearly it is necessary with what has happened to audit the procedures, as you can’t have a system without confidence. And above everything , we can’t have a system that can be cheated with,” says Christian Clausen.


That is what is called a predicament!

1) Over the weekend it seems like the sheer magnitude of the problem has provoked a serious anxiety attack.

2) The present system – be it LIBOR, CIBOR or EURIBOR – is broken! So much is clear. Where the banks are lost, is if it can be fixed. The initial: “Any initiative is welcome!” has been succeeded by: “It can’t be done”.

3) All CB have a reference interest rate – it has different names: Diskonto, Lombard or prime rate – fixed by the CB! What is missing is an interest rate structure: I.e. 3 months, ½ year and so on. But that should be easily done. The sovereign bonds do give some sort of interest structure, so why not let the CB’s fix that reference?

4) The next problem is, what are the Inter Bank Offered Rates used for – except cheating? With deposits running at 200 bio. DKK in the Danish Central Bank – at an interest rate of -0.2% – there isn’t exactly a general liquidity problem. Interbank lending is for the moment, apparently not an issue, as banks do not lend other banks money. So the primary justification simply isn’t there.

The other use is reference for zillions of customers loans and swaps (that they work well seems to be an allegation) – and as has been demonstrated, there, it has been used for cheating.

5) The need for reform must mean any sort of alternative fixing will be an improvement. Thus the quick fix is: Let the appropriate CB do it! By the banks own admittance, pulling the rates out of a hat would be better! Lotto numbers are drawn every week without legitimate critique.

No the point is; the commercial banks have the  business of fixing general rates.

The banks have lost at least this round to the CB’s. The real question is: Will the banks come out for the next? Again referring back to the British “White Paper” it seems unlikely, as the major banks (arbitrarily defined as “Systemic important”) are going to be split up. As the British banking system is 1/3 of Europe’s banking sector the LIBOR-scandal is a hard blow under the belt to the major banks at a particularly inconvenient moment.

Again who said the Queensbury rules applied? The banks most certainly haven’t used them, so they should not look for sympathy – because none will be extended.

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