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Trust Is Lost When Scales Are Rigged : Comments on Renewing LIBOR

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versione breve Sir, Lex comments (September 28) on Martin Wheatley’s recommendations for repairing the Libor regime by noting that “image is everything”. In response, I would like to suggest that regulators aiming to restore Libor’s credibility might look at modern literature for further advice. They then will find that the overhaul of the broken benchmark regime demands more than just the creation of a new image.

In his 1950s short story “The Balek Scales”, Heinrich Böll, the Nobel Prize-winning German writer, describes how the Balek family, whose members are portrayed as mighty landowners on a feudal estate near Prague in the 1900s, is unable to restore its credibility after the villagers find out that the only scales in town – which are owned by the family – have been manipulated. The Baleks operate the scales to determine prices in their trade with farmers and field labourers. When a village boy discovers that the scales have been rigged 55 grams per pound in favour of their owners, protests follow. The police are called and the local priest tries to appease rioters by demonstrating the accuracy of the scales in public.

While order is restored, trust is not: from now on, villagers will meet the Baleks with a protest hymn at the local Sunday service demonstrating that the family has forsaken its old status and moral authority.

What lessons does the story hold for the Libor debates? Calling the priest to sanctify the only scales in town will neither fix the defaults of a broken system nor restore its credibility. The development of a more reliable benchmark index should thus not be limited to questions of image. Rather, the success of reforms will also depend on how far the structural shortcomings of the old Libor regime will be fixed, for example by widening the number and nature of participating entities, and basing calculations on objective data-driven procedures.
   
tipo articolo
   
parole chiave LIBOR, Regulatory Reform, Trust
   
lingua English
data di apparenza 1-10-2012
giornale Financial Times
Editore Financial Times (London)
numero del giornale October 1
pagine 8
profile area SHSS - Kulturen, Institutionen, Märkte (KIM)
citation von Müller, C. (2012). Trust Is Lost When Scales Are Rigged: Comments on Renewing LIBOR. Financial Times, October 1, 8.