Wednesday, 4 July 2012

Their lips were moving

Having pointed out that Barclays was one of the least culpable banks in the understatement of Libor at the height of the liquidity crisis, I wondered how it came about that all the banks were lying at once.

I think there's a clue in the submissions data.  Look at the charts for UBSRoyal Bank of Canada, and WestLB (ignoring one point that looks like an error).  The deviations from Libor are tiny.  It's impossible for UBS in particular that this bears any relation to its actual borrowing costs: it had reported massive losses on mortgage derivatives in 2007 and 2008 and it would have had to pay higher interest rates than Barclays.  I suspect that it had little interest in borrowing in the interbank market, and wasn't getting quotes at all (or if it was, the people getting them weren't the ones responsible for BBA submissions).  In that case, the Libor quotes for BBA would have been generated by phoning a few brokers and asking them where they thought the market was, not specifically for UBS.  If several banks did the same thing, they would all generate very similar quotes without any sort of collusion.

My speculation is that many of the banks ignored the precise wording of the BBA question "At what rate could you borrow funds...", and answered instead the question "At what rate could a bank with good credit borrow funds..."  And that they did it not as a result of any instruction from on high that they should submit low quotes, but because that was a convenient way to get the numbers.  Generally it's considered poor manners to ask for a specific quote if you're not interested in trading, but quite normal to ask for information about the market.

So we could be in a bizarre situation where the banks who submitted quotes closest to the truth are deemed to be the worst liars, because they are the ones who made a conscious decision to distort the data.

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