So, maybe the Euribor and Libor rates correspond to something, but we know for a fact that they do not always, or even usually, correspond to an actual transaction. Nor, if you look at the guidelines for setting Libor on the British Bankers'Association (BBA) website, are they required to. Banks merely have to report the rate at which they "could" borrow funds before 11am, were they to decide to do so. How, exactly, each bank determines the rate is largely up to them.
The CFTC settlement says Barclays had "no internal procedures and controls" determining how the Libor rates were calculated. The BBA does not seem to have had any problem with that.
As it happens, the strangeness of this situation was captured very well by Sir Mervyn King in testimony to the Treasury Select Committee in late November 2008, when he had this to say about Libor.
"It is in many ways the rate at which banks do not lend to each other, and it is not clear that it either should or does have significant operational content. I think it is convenient, very often, for people to justify what they do for other reasons, in terms of Libor, but it is not a rate at which anyone is actually borrowing. It is hard to see how it can actually have much of an impact."
And yet, despite their inherent fuzziness and lack of "significant operational content", despite the lack of formal checks on banks' internal procedures for coming up with these rates, Euribor and Libor are the benchmark for pricing transactions worth trillions of dollars. US dollar Libor, for example, is the basis for the settlement of the three-month Eurodollar futures contract, which had a traded volume in 2011 with a notional value of $564 trillion, according to the CFTC.
Many of you will find all of that pretty odd - and pretty shocking. I know most economists would.The HSIB Shadow Committee for Potential Episodes of a Rebirth of the BBC sitcom Yes, Prime Minister, has been watching C-Span's coverage of Bob Diamond's testimony before Parliament, and wishing for the return of Oliver North. We wish Diamond had said something along the lines of;
'LIBOR is like bar [pub] time. Everyone knows the clock on the wall is set ten minutes ahead to give the bartender [publican] a margin of error to get his patrons out before legal closing time.' Everyone knows it, and adjusts their behavior.
'And, banking has nothing to apologize for, in terms of honesty, in comparison with politics, where convenient fibs have been known to have been told from time to time.'