It has been announced that the LIBOR rate will undergo an overhaul. Some of the changes I picked up were:
- It will be administered independently, not by the BBA (British Bankers Association)
- The admistering body will fall under regulation of the FSA (Financial Services Authority); therefore, future rate fixing could result in jail sentences for the offenders
- The rates will be audited, so banks will have to justify the rates put forward, based on actual transactions
- The number of banks submitting rates will be increased
- The number of currencies and interest rates involved will be drastically reduced so as to concentrate on the rates most used by investors and borrowers
The way in which the rate is determined, which had been thought may be changed will remain the same. It will be based on daily estimates by panels of banks, of the interbank borrowing rate. Although this method had been criticised earlier as not being objective, I guess the issue that was highlighted earlier is that in thin markets (e.g. in depressed economic conditions) too few or no trades take place, making it necessary to have an estimate.
This seems like a step in the right direction. I wonder if more reforms are to come to the banking industry. Many other questions are still worrisome. Are some banks too big to be properly managed? Do appropriate cultures of good governance exist within these organisations? Will the compensation structure be changed sufficiently to disincentivise ruthless risk taking? These concerns linger.