Libor, long the most important number in finance, dies at 52 • Hacker News Board

Re: Libor, long the most important number in finance, dies at 52

#91

Post by twic » Thu, Jan 20, 2022, 8:36 PM UTC

erichocean wrote: post #65

JackFr wrote: post #35

Earlier quoted context omitted.

It measures the answer to the hypothetical question "If a another bank with good credit came to you right now to borrow (overnight/1W/1M/3M) in (USD/EUR/GBP/CHF/JPY) what rate would you offer them?" Which is a proxy for the banks' willingless to lend. (It had a less quoted counterpart, LIBID the London Interbank Bid Rate, where would you borrow at.)

ELI5 Why not simply measure the actual trading activity for exactly those activities the previous day?

Good question. I suspect this was because when the rate was defined in the 1980s, collecting that data would have been difficult.

After the LIBOR scandal, the EU brought the benchmarks regulation (BMR) which says that interest rate indexes have to be based on actual transactions, just as you say. Euribor, the equivalent of LIBOR for lending in euros, was reformed to be based on transactions:

https://www.emmi-benchmarks.eu/benchmarks/euribor/reforms/

The administrator of LIBOR proposed doing the same:

https://www.clarusft.com/rfrs-libor-is-changing/

But in the end, US and UK regulators decided just to abolish it, in favour of overnight indexes based on real transactions (SONIA for pounds, which already existed, and SOFR for dollars, which was created for this purpose).

I believe this divergence happened because of differences in the lending markets. In the euro area, there is still a lot of unsecured term lending, which is what Euribor measures. But in the UK and US, this kind of lending has largely dried up, but there is a lot of overnight lending, so they chose rates which measure that. I don't know why the euro area is different to the US and UK here. It's possible that the euro market will evolve to be more like the US and UK, in which case Euribor will stop being credible, and the euro will also move over to its overnight rate, ESTR.

Another fun quirk is that SONIA and ESTR measure unsecured overnight lending, whereas SOFR measures "repo", which is essentially lending secured with government bonds as collateral. There is a sterling overnight repo rate, RONIA, but i don't think it's used much. I think repo volumes are higher than unsecured lending volumes; if that difference gets stark enough, perhaps sterling and euro regulators will force another switch, to the repo indexes.

Re: Libor, long the most important number in finance, dies at 52

#92

Post by twic » Thu, Jan 20, 2022, 8:39 PM UTC

marginalia_nu wrote: post #31

tomc1985 wrote: post #18

Man I'm glad I don't work for a fintech right now, there's a lot of very complicated code with LIBOR as an input

Having worked in fintech, I assume everyone ignored all signs toward this coming, assumed it would be postponed forever, and then collectively burst into a choir of "LIBOR gone? Inconceivable!"

How did you get access to my commit logs?!

Re: Libor, long the most important number in finance, dies at 52

#93

Post by stanleydrew » Thu, Jan 20, 2022, 8:40 PM UTC

javajosh wrote: post #57

hardtke wrote: post #6

I have an adjustable rate mortgage based on LIBOR and the lender still has not said what they plan to do. The presumed replacement rate (SOFR) seems to be pegged near 0% which would be good.

Why is this purely up to the lender? And if it is, of course they'll add something. You can't have individuals borrowing money interest free now, can we? (Institutions...that's more than fine, its expected.)

It's not "purely up to the lender." It's agreed upon in a mortgage contract, which the borrower signed. Both parties decided that it was a good idea, otherwise there wouldn't have been an agreement.

Re: Libor, long the most important number in finance, dies at 52

#94

Post by decafninja » Thu, Jan 20, 2022, 8:41 PM UTC

willcipriano wrote: post #82

decafninja wrote: post #68

Earlier quoted context omitted.

Agree with this 100%. I now make it a point to avoid any companies where tech is an unrespected cost center, which unfortunately does rule out the overwhelming majority of companies out there. That said, even companies where SWEs and tech are the profit center are certainly capable of laying you off, so profit vs cost center isn't really any insurance to avoid that sort of fate. Even at the banks I've worked at the t…

I have one primary question that I'm trying to figure out during job interviews. "Will my boss understand what I produce and the difficulty involved in producing it?" if the answer is no, the job is going to suck.

It's not just one level though. You can ask the same about whether your boss's boss will understand, and so on and so forth up the food chain.

The problem with many tech-as-a-cost-center companies is that you will quickly run into a person on that hierarchy who doesn't (often at or near the intersection between tech departments and the profit center business departments).

Re: Libor, long the most important number in finance, dies at 52

#95

Post by NoboruWataya » Thu, Jan 20, 2022, 8:45 PM UTC

kaesar14 wrote: post #51

fanzhang wrote: post #45

When I first heard about LIBOR in 2002, I was surprised that the number is just based on a survey of bankers. Surely there would be accuracy issues with that? But at that time I was young and had no finance experience, so though that the adults in the room knew best. Turns out not! I don't think the base problem is that people shaded their numbers one way or another, it's that the system is designed wrong.

This was also my impression learning about it as I was starting to learn about global finance in high school. Even them it seemed ridiculous. I wonder how many more systems currently in place are based on such foolish promises and easily exploited foundations of trust.

Trust is central to the financial system, for better or worse. The whole thing is based on trust - whether it's trust in the person on the other end of the phone, trust in the big-name bank that person works for, or trust in that bank's regulator.

This seems stupid to some tech people, who try to disrupt it by creating trustless systems such as distributed ledgers. But trust keeps on creeping back into the system. There are crypto custodians, crypto brokers, crypto exchanges, all of whom you have to trust to some extent. There is crypto lending. I wouldn't be surprised if we eventually have the Bitcoin Interexchange Offered Rate decided by a handful of the biggest exchanges.

Re: Libor, long the most important number in finance, dies at 52

#96

Post by NoboruWataya » Thu, Jan 20, 2022, 8:50 PM UTC

whatshisface wrote: post #67

outside1234 wrote: post #60

Earlier quoted context omitted.

It is a literary device to make a very boring topic interesting for mainstream readers.

A giant London banking scam touching on something that may even have been involved in the reader's mortgage contract, is not exactly a boring topic.

At a high level "there was a huge scam" sounds pretty interesting, but try to explain the detail and most people's eyes will glaze over.

Re: Libor, long the most important number in finance, dies at 52

#97

Post by codebolt » Thu, Jan 20, 2022, 8:53 PM UTC

yufeng66 wrote: post #59

hardtke wrote: post #6

I have an adjustable rate mortgage based on LIBOR and the lender still has not said what they plan to do. The presumed replacement rate (SOFR) seems to be pegged near 0% which would be good.

legally the new definition of 3 month Libor is sofr + 26.161bps

I know they will use a fallback spread to convert 3 month Libor to SOFR. But is the spread really a constant?

Re: Libor, long the most important number in finance, dies at 52

#98

Post by codebolt » Thu, Jan 20, 2022, 8:54 PM UTC

gadders wrote: post #16

hardtke wrote: post #6

I have an adjustable rate mortgage based on LIBOR and the lender still has not said what they plan to do. The presumed replacement rate (SOFR) seems to be pegged near 0% which would be good.

If you're in the US and the mortgage is dollar-based I would expect you to be transitioned to a SOFR-based loan, possibly with a credit adjustment spread.

What about SONIA, isn't that the dollar based equivalent?

Re: Libor, long the most important number in finance, dies at 52

#99

Post by citizenpaul » Thu, Jan 20, 2022, 8:56 PM UTC

skrebbel wrote: post #46

citizenpaul wrote: post #33

Earlier quoted context omitted.

>part of the cost cutting measures. Not sure why you would believe this. It is much harder for regulators to interview employees about their activities when they are no longer centrally located for convenient discussions. Its the same tactic they use in bury investigators with paperwork but for people.

Don't assume, you know nothing about the parent's situation.

I'm not assuming anything. Lying is part of business. The reason he was told was almost certainly not the actual reason.

Re: Libor, long the most important number in finance, dies at 52

#100

Post by citizenpaul » Thu, Jan 20, 2022, 8:58 PM UTC

decafninja wrote: post #38

citizenpaul wrote: post #33

Earlier quoted context omitted.

>part of the cost cutting measures. Not sure why you would believe this. It is much harder for regulators to interview employees about their activities when they are no longer centrally located for convenient discussions. Its the same tactic they use in bury investigators with paperwork but for people.

My department was very far removed from the issues in the scandal. I doubt investigators would have had much interest in us or found anything of use from interviewing any of us.

I believe that it was separated and 100% not involved. Do you think your company is above laying off an entire department to keep investigators off the trail of the real problem department?