Remember the big Libor makeover, prompted by fears that Libor was increasingly fictional? Well, now that we’ve all pretty much forgotten what the fuss was all about, the BBA has come out and decided to do nothing. In a 14-page paper, the BBA carefully runs down the list of all the proposed possible changes, and rejects each one.
The only proposal that got any traction at all was the idea of increasing the size of the panels — and that ran into the entirely predictable problem that no one had any desire to join them.
I think this is probably the right decision: this is the kind of thing where you have to be very aware of the law of unintended consequences. My hope is that as the interbank market remains illiquid, especially at relatively long tenors like six months and one year, financial markets will slowly move away from 6-month and 1-year Libor as standard benchmarks. That will solve the problem, insofar as there is a problem, slowly and quietly.
Incidentally, the FT is reporting this news in a most peculiar way: "BBA to enhance Libor governance" is the headline, and the story leads with the largely cosmetic tinkering that’s going on at the committee level; nowhere is it mentioned that all the possible substantive changes have been rejected. Is there a companion article about the rejection that I’m missing? Or did the FT just get this one wrong?
(HT: Alea)