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  • 01 Feb 2013 at 12:12 PM

Banks May Have Manipulated Euribor Out Of Modesty

The Libor scandal’s little brother, the Euribor scandal, is different from the Libor scandal in one important way. With Libor, banks are asked where they can borrow, and so if they can borrow at 2.5% and submit 2.4% then they’re lying. With Euribor, banks are asked where a prime bank can borrow, and so if they can borrow at 2.5% and submit 2.4% then … I mean, then who knows? Maybe they’re not prime? What’s a prime bank? This imprecision made Euribor impossible to manipulate, for some shady tautological meaning of “impossible to manipulate,” and so everyone felt very clever about avoiding scandals until they didn’t.

So when Libor rates were kept artificially low in 2007-2008, as banks tried to avoid seeming weak by submitting high rates: that was fraud. But when Euribor rates were kept artificially low, that was defensible. The intuition would be “well, last year we could all borrow at 3%, this year most of us can borrow at 4%, but we don’t look as prime as we used to. The best of us can still borrow at 3%, so Euribor = 3%.” That’s the intuition behind this amusing Banca d’Italia working paper by Marco Taboga:

Euribor rates are averages of survey responses by banks that are asked the following question: what is the interest rate that, to the best of your knowledge, a prime bank would charge another prime bank on an unsecured loan? The keyword in this question is “prime bank”. Before the crisis started, the concept of prime bank was probably rather unambiguous: there were dozens of large and internationally active banks that enjoyed AAA ratings and had tiny CDS premia (around or below ten basis points); any one of these banks would be easily recognized as a prime bank. During the crisis, however, most of these banks experienced deteriorations in their credit ratings and surges in their credit spreads. Which of them are still to be considered prime? In the absence of a standard de…finition of prime bank, this is a question that calls for quite a bit of subjective judgement. Therefore, it is conceivable that after 2007 Euribor rates might have been infl‡uenced also by changes in the survey respondents’’ perception of what a prime bank is. This paper provides empirical evidence in favor of this hypothesis.

The empirical evidence is more suggestive than definitive, and the effects are more visible post-2008 than during the crisis, but still. Here’s the picture: Read more »

Is it just obviously true that if (1) you had a Libor-based loan or swap or whatever, (2) Libor was intentionally manipulated by a bank or a scheming cabal of banks, and (3) that manipulation moved Libor against you and cost you money, then (4) you should be able to sue those banks to get back that money? Maybe? But then what do you do about this?

The preliminary analysis of individual quotes from panel banks shows that some anomalies can be found in the submissions, despite Thomson Reuters sanity checks. These anomalies can be seen as fat finger errors. For example on 12 June 2004, Bank 30 provided quotes between 44% and 55.5% for all tenors, and on 14 August 2006, the same bank provided quotes of 66% for a range of maturities (1 week to 3 weeks and 2 months to 5 months) as indicated in Chart 2.

That’s from the European Banking Authority – European Securities and Markets Authority report and recommendations on what to do about Euribor, a slightly less corrupt Continental analogue of Libor overseen by the European Banking Federation. Euribor was not, you’ll be pleased to know, 44% for any tenor on any date in 2004, but some of these fat finger errors do seem to have moved Euribor, though by mostly trivial amounts. Read more »

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. Read more »