Bankers can be as stupid as all get-out. That should have been obvious after the recent revelations of collusion among bankers who fixed LIBOR to cook their own books and skim some quick profits. There must be a more effective way to price short-term lending and assess credit risk among counterparties. Let's go exploring.
Credit default swap (CDS) spreads are premiums that investors pay as insurance against the default of debt issued by an underlying company. This is in effect a derivative bet on a company's solvency. CDS data isn't available from conventional media sources or retail brokerages. Investors would have to subscribe to a data service like Bloomberg Professional to get access. That's probably a bridge too far for most folks and not every company will have debt that traders will want to exchange in CDS deals. Companies with daily presence in credit markets need something uncomplicated and universally applicable. I may have a satisfactory answer.
There are several widely available amalgamated borrowing rates that large investors use to price credit. I'm thinking of LIBOR, HIBOR, SIBOR, TIBOR, and Euribor. If I were evaluating the credit risk of a borrower, I'd use a simple average of all of these rates. It just needs a catchy name . . . GIBOR. That stands for global interbank offered rate. You heard it here first.
GIBOR could even assess the health of the global financial system in the same manner as the Ted spread and LIBOR-OIS spread. In this case, GIBOR would be the numerator and an average of several central banks' overnight lending rates (approximating a global version of a risk-free rate) would be the denominator. A higher spread in basis points between the two means a rising price for short-term credit and increasing stress on the global financial system.
I wouldn't adjust the weight of each of the interbank offered rates by the size of their respective capital markets. I'd weight them equally on the premise that a single overnight loan or issue of a debt security may be packaged for offer in any of those rates' jurisdictions simultaneously. That means the issue could be immediately subject to any or all of the IBORs without regard to each market's size. Capital markets are liquid and global. Investment banks have the ability to reach across them instantaneously with offers.
I haven't worked out the kinks of this idea yet but it's worth a shot. The individual IBORs are subject to manipulation but so is everything else in our modern world. It would be much more difficult, but not totally impossible, for a participating bank to manipulate or front run all of them. The advantage of my proposed method is that it removes credit risk from the impenetrable darkness of proprietary analytical methods or CDS data trapped in dark pools of liquidity. Using all of the IBORs together brings credit risk into the light of day, for those with eyes to see. Let's go GIBOR!
Credit default swap (CDS) spreads are premiums that investors pay as insurance against the default of debt issued by an underlying company. This is in effect a derivative bet on a company's solvency. CDS data isn't available from conventional media sources or retail brokerages. Investors would have to subscribe to a data service like Bloomberg Professional to get access. That's probably a bridge too far for most folks and not every company will have debt that traders will want to exchange in CDS deals. Companies with daily presence in credit markets need something uncomplicated and universally applicable. I may have a satisfactory answer.
There are several widely available amalgamated borrowing rates that large investors use to price credit. I'm thinking of LIBOR, HIBOR, SIBOR, TIBOR, and Euribor. If I were evaluating the credit risk of a borrower, I'd use a simple average of all of these rates. It just needs a catchy name . . . GIBOR. That stands for global interbank offered rate. You heard it here first.
GIBOR could even assess the health of the global financial system in the same manner as the Ted spread and LIBOR-OIS spread. In this case, GIBOR would be the numerator and an average of several central banks' overnight lending rates (approximating a global version of a risk-free rate) would be the denominator. A higher spread in basis points between the two means a rising price for short-term credit and increasing stress on the global financial system.
I wouldn't adjust the weight of each of the interbank offered rates by the size of their respective capital markets. I'd weight them equally on the premise that a single overnight loan or issue of a debt security may be packaged for offer in any of those rates' jurisdictions simultaneously. That means the issue could be immediately subject to any or all of the IBORs without regard to each market's size. Capital markets are liquid and global. Investment banks have the ability to reach across them instantaneously with offers.
I haven't worked out the kinks of this idea yet but it's worth a shot. The individual IBORs are subject to manipulation but so is everything else in our modern world. It would be much more difficult, but not totally impossible, for a participating bank to manipulate or front run all of them. The advantage of my proposed method is that it removes credit risk from the impenetrable darkness of proprietary analytical methods or CDS data trapped in dark pools of liquidity. Using all of the IBORs together brings credit risk into the light of day, for those with eyes to see. Let's go GIBOR!
