Have you ever written a paper and a few years later the world figures out that you were making a very important point? While my own answer to this is "no", my colleague Connan Snider can say "yes". Here is an old draft of his LIBOR paper titled; "Does the LIBOR Reflect Banks' Borrowing Costs?"
Here is their Abstract:
The London Interbank Off ered Rate (Libor) is a vital benchmark interest rate to which
hundreds of trillions of dollars of fi nancial contracts are tied. Recently observers have raised
concerns that the Libor may not accurately reflect average bank borrowing costs, it's ostensible
target. In this paper we provide two types of evidence that this is the case. We first show
that bank quotes in the Libor survey are di cult to rationalize by observable cost measures,
including a given bank's quotes in other currency panels. Our second type of evidence is based
on a simple model of bank quote choices in the Libor survey. The model predicts that if banks
have incentives to a ffect the rate (as opposed to simply reporting costs), we should see bunching
of quotes around particular points and no such bunching in the absence of these incentives. We
show that there is strong evidence of the predicted bunching behavior in the data. Finally, we
present suggestive evidence that several banks have large portfolio exposures to the Libor and
have recently pro fitted from the rapid descent of the Libor. We conjecture that these exposures
may be the source of misreporting incentives.
Did Barclay's read this paper and act upon these ideas or did Snider anticipate and uncover a whole financial intrigue? The economist as detective. This is financial "Freakonomics" taking place at UCLA. Two cheers for Snider and Youle! Past reviewers of their paper should re-read their reports!
