The London interbank offered rate, the benchmark for $360 trillion of securities, may not survive allegations of being corrupted unless it’s based on transactions among banks rather than guesswork about the cost of money.
“The methodology used to formulate Libor is totally unsuitable for the modern world,” said Daniel Sheard, chief investment officer of asset manager GAM U.K. Ltd., which manages about $60 billion. “The British Bankers’ Association needs to come out on the front foot and say ‘this is a system that was appropriate 20 years ago but is no longer appropriate and we are going to change it.’”
The U.S. is conducting a criminal investigation into suspected manipulation of benchmark rates including Libor, the Justice Department said in a letter to a federal judge that was made public earlier this month. The European Union, the U.K. Financial Services Authority and the Monetary Authority of Singapore have all started their own probes.
Such a move would also bring Libor closer into line with Euribor, the rate at which European banks say each other can lend in euros. While 15 banks set yen Libor and 18 set dollar Libor, 44 set the Euribor equivalent.
Rates based on recorded trades such as Eonia and Sonia are gaining in popularity, said Mikhail Chernov, a professor of finance at the London School of Economics. The Eonia and Sonia indexes are weighted averages of the cost for banks to borrow from one another overnight in euros and sterling. The gauges are based on weighted averages of all overnight unsecured lending trades in the interbank market and are compiled by the EBF and the Wholesale Markets Brokers’ Association, a London-based industry group.