Liborgate Shows that Central Banks are Putting Banks in their Place

By Tom
Published on


There is a angle to the rage over LIBOR ”fixing” by the banks

As I remarked a few days back it has for very long been an open secret that the Danish corresponding rate for interbank loans CIBOR was as reliable as a fidelity plea in a paternity case. The mere fact that the Central Bank wouldn’t touch it with ten foot pole is in itself an indicator.

The CB does not have to interfere when the trade in the loan is minimal – then CIBOR is just something the bank says – given that banks are inane motor mouths the CB cannot be obliged to comment on all and sundry.

The main importance of the CIBOR lies in the agreed interest rates of loans to the banks costumers. If you are a healthy company and financially solid – interest rates are a subject for negotiation. In that case you are free to seek alternative offers to find out if improved conditions really are worth the bother (cost) of changing bank. Let’s be honest: How often do you push a rebate on your costumers – if they don’t ask for it themselves?

On the other hand: If you are being overcharged and can’t find a better supplier – then maybe you are not being overcharged at all. True, fixing the LIBOR is not exactly best business practices; but again? What did you expect?

With respect to the fixing of the CIBOR the Danish Bankers Association are out in their shrillest force – defending themselves to the VERY few that care listening to them. Pleas of innocence rarely make the prosecution drop the case.

But one significant point has been missed in the Danish Central Banks recent actions:

The discount rate (approximately: Prime rate) has dropped from 1 ¼% last year and then to ¾% in January by way of a couple of minor steps. This held till end of May when it dropped to ¼% and from today to 0%.

The discount rate is in itself a historical rudiment from the days when business men walked into the Central Bank to hock their IOU’s – the happy old days when defaulters were thrown in prison next to the court building. The main financial CB interest rate is today the deposit and lending rates.

It does however maintain some significance in two respects:

a) There are quite a lot of loans whose flexible interest rate is adjusted according to the discount rate.

b) A lot of legal interest rates are adjusted by the discount rate: The process interest rate is legally set to be discount rate plus 3%.

The relevance in this context is that the Central Banks are very well aware of what is generally going on in the banks. One thing is supposing, another is caring and finally acting as a police officer is a totally different thing.

This latest correction is an indication that CB interest adjustments have the purpose of stabilizing the currency – not fattening the banks profit margins.

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