Replacing the LIBOR with a Transparent and Reliable Index of Interbank Borrowing: Comments on the Wheatley Review of LIBOR Inital Discussion Paper

Abstract

We propose an alternative to the LIBOR based on three pillars. (1) Banks that participate in the rate setting process would have to submit bid and ask quotes for interbank lending and commit that they would conduct transactions within that range. If they traded outside of those ranges they would have to justify and face a penalty. This leads to the CLIBOR — for “committed” LIBOR. (2) All large banks would have to submit interbank transactions including rates to a data-clearing house. The data-clearing house would use the actual transactions to verify the commitment of the banks to the submitted rates. It would also report aggregate transaction data, keeping the actual identities of the trading parties anonymous, with a necessary time delay. (3) A governing body would be established from the CLIBOR participating banks, representatives of CLIBOR users, and other independent parties such as academics. That governing body would enter into a long-term contract, based on competitive solicitation, with a private sector entity to supervise the CLIBOR, operate the data-clearing house, and disseminate information.

Keywords: LIBOR, financial crisis, conspiracy, screening, interbank borrowing

JEL Classification: G20, G21, G28, K21, K22, K23, L41, L51