scandal .. manipulation is management??...NEVER..!!!

Libor scandal shows flaws in rate-setting

Even if banks do not deliberately manipulate the rates, the benchmark remains vulnerable

Peter Eavis & Nathaniel Popper / Jul 21, 2012, 00:54 IST It is an open secret in the banking world: the interest rates for many mortgages and loans are based on a benchmark that is largely guesswork. The flaws in the rate-setting process, used to determine the pricing for trillions of dollars of financial products, have been exposed by the latest banking scandal. Regulators around the world are investigating whether big banks gamed the rates for their own benefit before and after the financial crisis. But even if banks do not deliberately manipulate the rates, the benchmark remains vulnerable. Banks derive the rates from estimates, rather than real market data. So, the benchmark, a measure of how much banks charge each other for loans, does not necessarily represent actual borrowing costs. This weakness has only been exacerbated in recent years, as banks have mostly stopped lending to each other. The Federal Reserve chairman, Ben S Bernanke, told Congress this week that he did not have “full confidence” in the process, calling it “structurally flawed.” The troubles centre on a key benchmark known as the London interbank offered rate, or Libor. This rate and its variants are used to determine the prices for mortgages and other loans, and play a critical role in the multitrillion dollar market for the financial contracts called derivatives. The Libors are set every weekday around 11 am, a process overseen by the British Bankers’ Association. At that time, a group of big banks report how much interest they would pay to borrow money from other institutions over different periods and in different currencies. After removing the outliers, the remaining numbers are averaged to come up with the various rates. On Thursday, the three-month Libor, in American dollars, stood at 0.4531 per cent. But the precise rates have little basis in reality. Since the crisis, many banks have been content to park their cash with central banks, rather than lending it out to other institutions. That means there are few interbank transactions on which to base their Libors, according to bankers who operate in this market. “Libor was intended for an international lending market that has long since past,” said Pete Hahn, a finance professor at the Cass Business School in London. “The whole concept of interbank lending died after Lehman Brothers collapsed.”............................ http://www.businessstandard.com/india/news/libor-scandal-shows-flaws-in-rate-setting/481018/