The best way to read this Journal article about how a bunch of banks manipulated Euribor may be: while whistling the theme from The Great Escape:
The goal was for Euribor to be manipulation-proof. … Instead of asking each bank how much it would cost it to borrow from a fellow bank, Euribor was based on a different query: How much would it cost a theoretical “prime bank” to borrow? By making the question theoretical, the EBF tried to remove the risk that a bank would deliberately understate its borrowing costs in an attempt to conceal its financial problems …
THEY SAID IT COULD NOT BE MANIPULATED, BUT ONE MAN MANIPULATED IT ANYWAY. Or a lot of men, and some women. Really pretty much everybody it seems like:
The European Union is expected soon to accuse multiple banks of attempted collusion in the setting of Euribor, according to people briefed on the probe. Barclays PLC has already acknowledged trying to rig the rate, and other banks are likely to be pressed by regulators in the U.S., U.K. and elsewhere into similar admissions, according to industry and regulatory officials. … At least a dozen banks are under investigation, at least four of them for allegedly working with Barclays, according to disclosures by banks and regulators.
My favorite thing about Euribor’s “manipulation-proofing” – which besides the “hypothetical-bank” thing also includes asking a bunch of banks so no one bank has too much influence – is that, while it perhaps reduces the likelihood of manipulation, it greatly reduces the likelihood of proving manipulation. You could see how this would be appealing to a regulator. “Our benchmark is perfect,” you say, “there’s never been a single proven instance of manipulation!” Plus since no facts can ever falsify a Euribor submission, you never have to work that hard to investigate them.
It should also be appealing to a trader who wanted to manipulate Euribor – it’s a perfect crime! you’ll never be caught! – except that the manipulation by definition requires a conspiracy, and the sort of trader who wants to manipulate interest rates – which it turns out is a thing – tends also to be the sort of trader who does his conspiring via permanently preserved IMs and emails. So, caught. Though the defense here seems better than the Libor defense: “Oh sure we wanted to make the rate higher, but we thought about it honestly for a while, and we decided that Hypothethical Prime Bank really could borrow at 1.00% in the Theoretical Money Market. Prove us wrong!”1
So anyway this all seemed like a foolproof plan for everyone except, like, The Victims Of Manipulation,2 and now sadly it is crashing down on all of their ears and forcing the regulators to investigate and the traders to be investigated, probably fired, possibly jailed. All very unpleasant.
My pet idea for a while has been that there ought to be an interest rate benchmark where the survey is “what would you like 1-month Schmibor to be?” and you just write down your favorite number. You want to call your friends and ask them what their favorite number is? Go ahead! You want to tell them to write down your favorite number? Be our guest! Just, please, go nuts.
How bad would this be? I don’t know. It’s my pet idea because I suspect it wouldn’t be that bad: every bank is long a lot of interest rates and short a lot of interest rates, and their clients are on the other side and possessed of phones and an assortment of colorful curse words, and nobody would trade Schmibor swaps with you if you consistently made Schmibor too high or too low, and everyone benefits from predictability and stability, and … I dunno, I kind of feel like it’d end up like Libor. Mostly it would track “real” short-term interest rates, and sometimes it wouldn’t for, like, a Good Reason (in some banks’ minds).
Even better, you could only get so agitated about it, because it would be genuinely immune to manipulation, in the only way a financial product can be immune to manipulation (and in the way Euribor strove to be immune from manipulation): by making it 100% manipulation. Lying about your cards is okay if you’re playing poker. So: economically about as good or bad as Libor, but without the scandals. Seems like a net plus.
Again, I don’t know. This would probably be terrible, though I’m not sure it’s as terrible as it sounds. Either way, it’s worth pondering. If you think this would be obviously terrible – so obviously terrible that no one would sign up to a contract indexed to Schmibor – then that should trouble you at least a little bit. It’s not obvious that Libor and Euribor’s “make up a number” surveys are all that meaningfully different.
Banking Industry Squirms Over European Rate Probe [WSJ]
1. One way to prove them wrong is to note that “Euribor regularly and significantly differed from EuroLibor for the same contributors, at times well in excess of 1 basis point.” The only problems I see with this are (1) EuroLibor and Euribor asked different questions so there’s no reason to believe they should get the same answer and (2) Libor was faked too, so.
2. A nebulous group:
In Spain, for example, Euribor underpins interest rates on tens of thousands of residential mortgages. A group called Operación Euribor is trying to help Spanish mortgage borrowers, especially those at risk of eviction, wriggle out of their mortgage obligations based on what it says are irregularities in Euribor. Francisco Jurado, a Ph.D. student in Seville who helped launch the group last year, argues that Euribor is imprecise and subjective and therefore inconsistent with Spanish law requiring interest rates to be based on objective data.
So it was too high then? Or, just, like, too weird?