How to Get New Banks to Join the LIBOR Panel
“We cannot get new banks to join the LIBOR panel. This is unfortunate from my perspective. But you can understand the situation of a bank chief executive who has to explain to shareholders why the bank should join a LIBOR panel, given the past,” said Finbarr Hutcheson, president at the Intercontinental Exchange (ICE) Benchmark Administration. Mr. Hutcheson needed to signal a clear break with past scandals, improve the index’s shortcomings, and regain the trust of institutions and investors. The London Interbank Offered Rate (LIBOR) was the most important benchmark of the international financial system. LIBOR was a “polled” measure, indicating the average rate at which LIBOR contributor banks could obtain unsecured funding in the London interbank market. Hundreds of managers, traders, and brokers working for the most prestigious global banks had manipulated LIBOR over several years, finally resulting in jail sentences and heavy fines by U.S. and European regulators. One way to make the LIBOR more robust was to increase the participation of banks. How could Hutcheson do this? Was the LIBOR a flawed measure that inevitably lent itself to conspiracy?
- Describe the LIBOR and how it has been computed, including the defining features of a new reference interest rate and the new compliance versus the former honor approach
- Evaluate the changes made to the LIBOR and the impact of erroneous LIBOR estimates on participant institutions and their shareholders
- Evaluate the strategies to increase the number of LIBOR participant institutions