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ALİ GÖKHAN

TRLIBOR is safe!

The Libor – London Interbank Offer Rate is a set of rates for different currencies and maturities that is supposed to be the benchmark for some 800,000,000,000,000 USD (that is USD 800 trillion) worth of transactions, according to the BBC. A huge scandal erupted a couple of months ago surrounding these rates and it does not seem to be waning. First, let’s look at how these rates are determined and how the scandal developed. And then let’s see if we should be afraid of a similar scandal in Turkey regarding our own “benchmark rates,” TRLIBOR.

Libor is controlled by the British Banker’s Association (BBA) and is determined as follows: Every day a group of leading banks submit their rates to the BBA. Note that these rates do not reflect any real transactions. They are only estimates of what each bank would pay other banks to borrow in a given currency and maturity. After the rates are submitted, the top and bottom quartiles are dropped and the rest of the rates are averaged. That’s it. So you see in theory it is not very easy to rig if the banks in question cooperate somehow.

The scandal started with Barclays. Apparently apart from trying to profit from some of their positions (I will spare you the details), Barclay’s also submitted lower rates in order to look financially sound during the 2008 crisis. (Fig 1*)


Even though both the CEO and the chairman of Barclays resigned following the scandal, the crisis continued to spread on a lot of different fronts. The one that got my attention was a piece I saw in the FT last week regarding Korea’s own benchmark rate scandal**.  This got me thinking of our own benchmark rate, TRLIBOR.

As far as I know, TRLIBOR is determined through more or less on a similar process and the Banks Association of Turkey (BAT) maintains it. So are we also in danger? Well, this is actually not the right question. The right question is does it really matter? I know from word of mouth that TRLIBOR is rarely used among banks, even for derivatives contracts let alone credit agreements (floating rate TL credit is very rare). Luckily the BAT also publishes the volume statistics as participating banks are required to submit transaction statistics as well. Let’s look at how deep the TRLIBOR market was in 2012 (Fig 2, Fig 3) for each maturity from overnight (O/N) to one year (1Y).





Things to note here: First of all, these figures are a joke when compared to the size of the banking system. Moreover, notice that most maturities don’t have any transactions on most days and on some days there are no transactions at all! And finally most active maturities are the shortest maturities, overnight being the most active by far. The short maturity is also not a good sign as I think the most active are three-month Libor rates for USD and 6 months for Euribor.

So, if I am not mistaken (please correct me if I am, as I have doubts about the transaction data), it is safe to say that we should not be worried about a rate-rigging scandal. However, it is not because we have a better system to set rates but because nobody seems to care about TRL benchmark rates. I hope one day the market grows to a point where a potential scandal has some chance of making it to the front page.

* http://www.bbc.co.uk/news/business-19199683
** http://www.ft.com/intl/cms/s/0/3e0da92a-d62c-11e1-b547-00144feabdc0.html#axzz23MXld7Db

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