Danish Cibor Rate Under Review After UK Libor Scandal
07/24/2012| 01:42pm US/Eastern
By Flemming Emil Hansen
COPENHAGEN--The UK Libor rate scandal has sparked a lively debate about the Danish equivalent, the Copenhagen interbank offered rate, and prompted a government probe into the setting of the Cibor. Still, regardless of the outcome, the Cibor's days as a key reference rate may already be numbered.
Financial sector umbrella organization Finansraadet, which supervises the Cibor, continues to back the rate-setting regime but is also open to adjusting it rather than finding a new benchmark rate model to replace it.
"We will sit down and take a closer look at it. If there's a reason to adjust, we will be open to do so," Finansraadet said to The Wall Street Journal in a statement. "As a starting point, however, our trust in the Cibor is and has always been unbroken."
The Cibor, which guides the interests on a long list of Danish credit products, was first brought to the center of attention in late June, after UK bank Barclays PLC. (>> Barclays PLC) was found guilty and heavily fined for attempts to manipulate the UK Libor rate.
As opposed to the Libor, which expresses the average rate banks are able to borrow at, the Cibor is an average of rates at which the participating financial institutions are willing to lend to other prime-rated banks. This means that where Barclays allegedly tried to prop up the image of its solidity by reporting lower borrowing rates, Danish banks would only be able to profit by setting a higher than realistic Cibor rate level, as this would allow them to raise interests on a number of loans.
Earlier this month, the Danish minister of commerce and growth, Ole Sohn, launched a formal probe to shed light on the precision and possible fallibility of the Cibor regime, and mainly whether it has been set too high, costing financial sector customers billions of Danish kroner.
"In light of the insecurity as to the rate-setting, I will have a study produced which is to form the foundation for potential further initiatives and investigation," Mr. Sohn said.
The probe is scheduled to be concluded by September. While it is likely to eventually lead to a new Cibor system, the likeliness that it will reveal a financial sector scandal of British proportions are, however, close to nonexistent, said Caspar Rose, professor of economics at Copenhagen Business School.
For the Cibor-participating financial institutions to actually manipulate the Cibor, it would require a complicated, concerted and systematic effort, and there are no signs in the individual reported quotes of such a cooperation, Rose said.
"I see no indications of a smoking gun in Denmark," Rose said. "But trust in the Cibor is of the essence, and the trust may already have suffered irreparable damage," he said.
One finding that has shaken the trust was the revelation that higher interbank lending rates reported by four Danish banks bumped up the Cibor in 2011.
Danish lenders Danske Bank A/S (DANSKE.KO), Jyske Bank A/S (JYSK.KO), Sydbank A/S (SYDB.KO) and Nykredit Bank A/S in 2011 reported interbank offered rates higher than foreign banks participating in the Cibor setting, financial daily Borsen has reported, based on a close scrutiny of the individual quotes.
Specifically, UK banks Barclays PLC and Royal Bank of Scotland PLC (>> Royal Bank of Scotland Group plc) reported markedly lower rates, according to Borsen.
All of the four banks in question declined to comment on the information when asked by The Wall Street Journal, but said they would await the findings of the government probe before commenting further.
Mr. Rose said, meanwhile, that the higher average rates reported by the four Danish banks are likely the result of a tougher Danish banking environment, rather than a sign of foul play.
The Danish banking sector was hit extraordinarily hard by the international financial crisis, which meant that the local interbank lending market largely vanished. The lack of turnover in the interbank lending market, Mr. Rose said, means that the rates reported by the Danish Cibor banks are hypothetical rather than based on trades.
"The reported rates are rather speculative, and that is a problem when it defines a benchmark rate with a huge real economic importance".
"We need a new model, and I think that will also be the result of the work that has now been started," Rose said.
The Danish National Bank, which withdrew from its role as collector of the Cibor quotes in early 2011 due to the low turnover in the interbank lending market, has proposed supplementing the Cibor with a benchmark rate based on Cita interest swaps.
The proposal initially got a cool reception from Finansraadet, but the organization now says on its home page that it will consider the opinions of Cibor participants about an introduction of a parallel Cita rate.
-Write to Flemming Emil Hansen at firstname.lastname@example.org
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