The LIBOR scandal has been a painful reminder that it’s not an actual traded rate. In the best of times it is a guess, based on traders’ triangulation of market data, news, gut feel, and what they ate for breakfast. Fine. So the idea is to use a traded rate. But where is that data going to come from? Unlike Fed Funds, where there is an effective rate published by the Fed daily, term inter-bank deposits are somewhat more opaque. We are still searching for published data, a trade repository, or anything that might give a clue.
The one piece of research that points in the right direction is a draft paper out of the New York Fed “A comparison of Libor to other measures of bank borrowing costs” (June 2012) by Dennis Kuo, David Skeie and James Vickery. They implied volume and rates for inter-bank loans from an algorithm using data parsed off the Fedwire. Clever. Their numbers tell a story of inter-bank volume dive-bombing and credit spreads spiking during the peak of the financial crisis (September 15, 2008 to November 11, 2008). For example, the number of 3-month trades, according to their analysis, fell by over 90% from the pre-crisis period to the crisis peak. Volume traded for the same periods/maturities was off by nearly 75%. Interestingly, they compare rates for LIBOR panel banks versus other banks (as a spread to OIS). LIBOR panel banks actually transacted at lower spreads than non-panel banks did. This is far from conclusive, but the first time we’ve seen anything with hard data on transacted rates. Now if they could only compare where those LIBOR panel banks traded versus the rate they contributed to the LIBOR panel…
If inter-bank loans remain the right benchmark to use (we are, admittedly, skeptical given the credit risk embedded) then getting the data will have to be priority one. This could be a challenging number collection exercise given the far-flung nature of the inter-bank loan market. And if volumes remain so much lower now than pre-crisis, even traded deposit data might be quirky and not the best ammo for benchmarks. You’ve heard of “garbage in, garbage out”, right?
Are there viable alternative benchmarks? OIS perhaps? Repo? LIBOR 2.0, the sequel? We’d love to hear your opinions.
A link to the Fed research piece is here.