Stephen Cecchetti, Kim Schoenholtz, 27 September 2017

Financial firms have paid fines totalling more than $9 billion for manipulating LIBOR, yet this flawed benchmark has not been replaced. This column argues that there are reduced incentives for banks to participate in setting the LIBOR rate, and so the potential of, and incentives for, manipulation remain. Although LIBOR is unsustainable, international regulators are working to produce more robust alternatives and to smooth the transition.

Nina Boyarchenko, David Lucca, Laura Veldkamp, 19 November 2016

Information sharing has come under increased scrutiny in the context of interbank lending, foreign exchange markets, and US Treasury auctions. This column explores the benefits and drawbacks of information sharing by dealers in US Treasury auctions. Information sharing is found to benefit first and foremost the issuer, i.e. the Treasury. The model provides insight on auction revenue, risk-sharing, and the decision to bid through a dealer, with information sharing having a sizeable effect on each.

Darrell Duffie, Piotr Dworczak, Haoxiang Zhu, 16 February 2015

Trillions of dollars’ worth of transactions depend on financial benchmarks such as LIBOR, but recent scandals have called their reliability into question. This column argues that reliable benchmarks reduce informational asymmetries between customers and dealers, thereby increasing the volume of socially beneficial trades. Indeed, the increase in trading volume may offset the reduction in profit margins, giving dealers who can coordinate an incentive to introduce benchmarks. The authors argue that benchmarks deserve strong and well-coordinated support by regulators around the world.

Vincent Brousseau, Alexandre Chailloux, Alain Durré, 09 December 2013

In the aftermath of the LIBOR scandal, it is important to re-establish a credible reference rate for the pricing of financial instruments and of wholesale and retail loans. The new candidate must meet the five criteria suggested by the Bank for International Settlements – reliability, robustness, frequency, availability, and representativeness – in all circumstances. This column argues that strengthening governance and/or adopting a trade-weighted reference rate is probably the fastest approach, but not necessarily sufficient for a resilient reference rate in the long run.

Avinash Persaud, 21 July 2012

The Libor scandal rolls on – feeding a common perception of widespread bank misbehaviour. This column argues that understanding the crisis strengthens the sense of a conspiracy, but weakens the sense of criminality. The Libor system could not function in periods of extreme stress where the interbank market disappeared and reporting higher borrowing costs led to even higher borrowing costs. As Mervyn King said, Libor was the rate at which the banks didn’t lend to each other. One possible reform would replace Libor with some commonality of lending rates between major central banks and prime banks.

Francesco Giavazzi, 02 June 2008

Editor's Note: Originally posted 2 June 2008. There has been a persistent spread between the rate at which banks lend each other money and government-backed securities yields in recent months. This column describes hypotheses explaining the spread – including the possibility that banks aren’t lending in order to bankrupt acquisition targets.

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