October 11, 2018

Compared to regulators’ manipulation of bank credit, Libor manipulation is as peanuts as peanuts come

Sir, I refer to Katie Martin’s “Scrapping of Libor benchmark leaves $500bn of bond contracts in limbo”, October 11.

I’ve been on both sides of Libor, as a lender and as a borrower. I have never thought it a precise instrument, but good enough, sometimes you lose, sometimes you win, especially when any implied manipulation is done by speculators who are indifferent to whether Libor is too high or too low. What matters to them is their position in Libor futures, at any time. 

In the long run, for all other Libor dependent, its manipulation ends up in a big wash.

The big hullaballoo around it, and forced search for substitutes, are just a big distraction from the real dangerous manipulations. 

Current credit-risk weighted capital requirements for banks pushes credit towards dangerous excessive exposures to the safer present, and away from what is required by the riskier future. Sir, for both borrowers and lenders, that is an extremely costly manipulation. As less capital allows for larger bonuses, only bankers win.